NEW YORK – OCTOBER 17: Traffic flows on Broadway near the Nasdaq Market site in Times Square… [+] October 17, 2002 in New York City. The Nasdaq 100 closed up 3.84 percent in daily trading. (Photo by Stephen Chernin/Getty Images)
Nasdaq makes its first foray into crypto services with a focus on security, entering the business with a Bitcoin and Ether custody product aimed at institutional investors.
“We believe that custody is fundamental to every other service we develop,” said Ira Orbach, the newly appointed head of Nasdaq Digital Assets. “The ability to keep our clients’ funds safe, scalable and accessible is a key starting point for everything we do going forward,” said the former head of crypto prime brokerage at Gemini Exchange.
Crypto custody is central not only to Nasdaq’s digital assets ambitions, but to the industry as a whole. Customers must place the utmost trust in their custodian banks, a trust that individual investors are only skeptical about delegating. This caution has led to the phrase “not your key, not your crypto,” meaning that private keys — much like passwords for accounts with crypto funds — are not in the hands of intermediaries. Since institutions are unlikely to build their own asset custody infrastructure, they need to select a partner willing to hold institutional-size crypto accounts.
When asked why clients would choose a traditional financial player over a crypto-native firm to hold their digital assets, Auerbach replied that it was because of his knowledge of what institutional clients would need to use the financial product. Nasdaq is uniquely located.
“We have a long history of working with these institutions, we know their vulnerabilities, we have developed products in-house to address those vulnerabilities,” Auerbach said. “We believe that we can make institutions more comfortable and start the mass adoption of the ecosystem.”
In parallel with the custody service, Nasdaq is expanding its anti-financial crime technology to combat money laundering, fraud and market abuse in digital assets. The advantage of the Nasdaq is that the company is able to analyze potential fraudulent behavior in both traditional markets and digital assets, says Valerie Banert-Thurner, senior vice president of anti-financial crime technology at Nasdaq.
“Criminals don’t just operate in the chain,” Bannert-Thurner said. “We try to look at risk and identify real players who are cheating or manipulating the markets and are not limited to on-chain or off-chain. We say let’s take a look.”
Bannert-Thurner says the knowledge Nasdaq has from its crime-fighting business carries over into the world of crypto, even if the underlying technology sometimes looks different. “Real scams are no different than they used to be,” Bannert-Thurner said. “Money laundering is still money laundering, but it’s done a bit differently because you have to find mechanisms for it.”
Nasdaq sells its financial crime fighting technology as a service to clients such as crypto exchanges. While the new custody product is a separate effort, it will feature crypto-specific technology to fight financial crimes. One of these security measures includes verifying details about where digital assets come from and where they are sent. In general, users can send cryptocurrencies without the recipient to any address they consent to, just as anyone who knows where you live can send email without your consent. This wallet is at risk of a practice known as spamming or “dusting,” which became popular when addresses associated with cryptomixer Tornado Cash were approved by the US Treasury Department. Those using Tornado Cash began sending small amounts of cryptocurrency to wallet addresses of celebrities like Jimmy Fallon to protest the sanctions. For example, Nasdaq’s screening tool flags funds originating from approved wallets.
Nasdaq’s foray into digital assets comes at a time when other players, including BlackRock and Fidelity, are building crypto support. In August, BlackRock partnered with Coinbase to offer a private trust that offers Bitcoin exposure to institutional clients. Earlier this month, EDX Markets, backed by Charles Schwab SCHW Corp., Fidelity Digital Assets and Citadel Securities, launched plans to trade select tokens this year. The increased investment in digital assets comes despite continued market volatility and a 59% year-over-year price decline for Bitcoin as the top asset.
“The big companies are just getting started, many of them are still researching, but many are already working on going into space,” Bannert-Thurner said. “We’re certainly a long way from seeing full institutional involvement.”