Nasdaq takes its first steps into crypto services with a focus on security, entering the business with a custody product for Bitcoin and Ether aimed at institutional investors.
“We believe custody is fundamental to every other service we develop,” said Ira Auerbach, the newly appointed head of Nasdaq Digital Assets. “Being able to keep our clients’ funds safe, scalable and accessible is an important starting point for everything we will do going forward,” added the former head of crypto prime brokerage at the Gemini exchange.
Crypto custody is central not only to Nasdaq’s digital assets ambitions, but to the industry as a whole. Customers must place enormous trust in their custodian banks, a trust that private investors are only skeptical about giving up. This caution has led to the phrase “not your keys, not your crypto,” meaning that private keys – analogous to cryptocurrency account passwords – do not belong in the hands of intermediaries. Since institutions are unlikely to build their own asset custody infrastructure, they need to select a partner willing to host institutional-size cryptocurrency accounts.
When asked why clients would choose a traditional financial player over a crypto-native firm to hold their digital assets, Auerbach replies that Nasdaq is uniquely positioned because of their knowledge of what institutional clients need to leverage a financial product .
“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 we can make institutions much more comfortable and usher in broader adoption of the ecosystem.”
In parallel with the custody service, Nasdaq is expanding its anti-financial crime technology to stamp out money laundering, fraud and market abuse of digital assets. Nasdaq’s advantage is its ability to analyze potentially fraudulent behavior in both traditional markets and digital assets, says Valarie Bannert-Thurner, Nasdaq’s senior vice president of anti-financial crime technology.
“The criminals don’t just operate on-chain,” said Bannert-Thurner. “What we’re trying to do is look at risk and try to identify the actual players who are perpetrating the scams or manipulating the markets, and not be limited to on-chain or off-chain. We say let’s look at it from the other side.”
Bannert-Thurner says the knowledge Nasdaq has from its anti-crime business carries over into the world of crypto, even if the underlying technology sometimes looks different. “The actual scams aren’t that different from what happened before,” Bannert-Thurner said. “Money laundering is still money laundering, but a little different 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 endeavor, it will feature crypto-specific anti-financial crime technology. One of these safeguards includes screening details about where digital assets come from and where they are being sent. Typically, users can send cryptocurrencies to any address without the recipient having to consent, just like anyone who knows where you live can send email without your consent. This poses a risk of wallet spamming, or a practice known as “dusting,” which became popular when addresses associated with crypto mixer Tornado Cash were sanctioned by the US Treasury Department. People who had used Tornado Cash began sending small amounts of cryptocurrency to the wallet addresses of celebrities like Jimmy Fallon to protest the sanctions. For example, Nasdaq’s screening tool will show funds originating from a sanctioned wallet.
Nasdaq’s entry 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 to institutional clients. Earlier this month EDX Markets – assisted by Charles Schwab
“The big companies are starting now, many of them are still exploring, but many are already working to get into the space,” Bannert-Thurner said. “We’re certainly a long way from seeing full institutional involvement.”