Nasdaq enters crypto business with focus on security
NEW YORK – OCTOBER 17: Traffic flows down Broadway past the Nasdaq Market in Times Square … [+]
Nasdaq is taking its first steps into security-focused crypto services, entering the business with a bitcoin and ether custody product aimed at institutional investors.
“We feel that custody is fundamental to every other service we build,” says Ira Auerbach, the newly appointed head of Nasdaq Digital Assets. “The ability to hold our clients’ funds in a safe, secure, scalable and accessible way is an important starting point for everything else we do in the future,” added the former head of the Gemini exchange’s crypto brokerage house.
Kryptodepot is central not only to Nasdaq’s digital asset ambitions, but to the industry as a whole. Clients are required to place enormous trust in their custodians, a trust that individual investors are wary of relinquishing. This caution has given rise to the phrase “not your keys, not your crypto”, which means that private keys – analogous to passwords for the accounts that hold crypto funds – do not belong in the hands of middlemen. Since institutions are unlikely to build out their own infrastructure to deposit assets, they must choose a partner that is prepared to take care of institutional-sized cryptocurrency accounts.
When asked why clients would choose a traditional financial player over a crypto-native firm to look after their digital assets, Auerbach says Nasdaq is uniquely positioned because of its knowledge of what institutional clients need to use a financial product.
“We have a long history of working with these institutions, we know their pain points, we have products built in-house to address those pain points,” Auerbach said. “We think we can make institutions much more comfortable and usher in greater adoption of the ecosystem.”
In parallel with the custody service, Nasdaq is expanding its anti-financial crime technology to weed out money laundering, fraud and market abuse in digital assets. The advantage Nasdaq has is that the company has the capabilities to analyze potentially fraudulent behavior in both traditional markets and digital assets as well, says Valarie Bannert-Thurner, senior vice president of anti-financial crime technology at Nasdaq.
“The criminals don’t just operate on the chain,” Bannert-Thurner said. “What we’re trying to do is look at the risk and try to identify the actual actors who are doing the fraud or manipulating the markets and not be limited to the chain or off the chain. We’re saying let’s look at it across the board.”
Bannert-Thurner says the knowledge Nasdaq has from the anti-crime business translates to the crypto world, even if the underlying technology sometimes looks different. “The actual scams are not that different from what happened before,” Bannert-Thurner said. “Money laundering is still money laundering, but done a little differently because you have to find mechanisms to do it.”
Nasdaq sells its anti-financial crime technology as a service to clients like crypto exchanges. While the new custody product is a separate effort, it will have crypto-specific anti-financial crime technology built-in. One of these protections includes screening details of where digital assets originate and where they are sent. Generally, users can send cryptocurrencies to any address they like without the recipient needing consent, in the same way that anyone who knows where you live can send mail without your approval. This risks spamming the wallet or a practice referred to as “dusting”, which became popular when addresses associated with the crypto mixer Tornado Cash were sanctioned by the US Treasury Department. People who had used Tornado Cash started sending small amounts of cryptocurrency to the wallet addresses of celebrities like Jimmy Fallon to protest the sanctions. Nasdaq’s screening tool will flag funds coming in from a sanctioned wallet, for example.
Nasdaq’s foray into digital assets comes as other players, including Blackrock and Fidelity, build crypto support. In August, Blackrock partnered with Coinbase to offer a private trust offering bitcoin exposure for institutional clients. Earlier this month, EDX Markets-backed by Charles Schwab
“The big firms are starting now, many of them are still exploring, but many are actually already working to move into the space,” Bannert-Thurner said. “We certainly haven’t seen the full institutional participation yet by any means.”
