Nasdaq has become the latest financial heavyweight to be toying with blockchain technology. It is reportedly testing the technology to see how it can streamline the trading and settlement of shares on its exchange.
The trial is taking place on its Private Market, a marketplace launched last year to handle the trading of pre-IPO shares. Seventy-five private companies currently use the facility. Shares are currently transferred in a highly manual process that includes lawyers maintaining spreadsheets by hand.
Bitcoin’s blockchain is envisioned to speed up the transfer of securities and bring down costs. For example, instead of the traditional three-day settlement period, share transfers can be settled in near real-time. This can greatly reduce counterparty risk and eliminate the need for billions in capital traditionally kept aside as insurance against it. If successful, the technology can be potentially adapted to Nasdaq’s main stock exchange.
Nasdaq Chief Executive Robert Greifeld said that the technology can benefit both the exchange’s clients and the broader capital markets. He said, “Utilizing the blockchain is a natural digital evolution for managing physical securities.”
ATFX Institutional Business Continues to Expand: Adding a New Prime BrokerGo to article >>
While it would seem to be a no-brainer, regulators have until now been hesitant to employ untested technology. The blockchain’s current validation procedure also relies on miners, who can operate anonymously and theoretically pose a threat to the network.
Nasdaq has in fact been increasing its involvement with Bitcoin from various angles during the past twelve months. Last year, there were reports of it competing to become a central bitcoin trading hub. It is also envisioned as the venue for trading of the proposed Winklevoss Bitcoin Trust, which is still pending regulatory approval. More recently, its technology was adapted by Noble Markets to power its bitcoin marketplace. The Stockholm Stock Exchange, which is part of the NASDAQ OMX group, will also be hosting an exchange traded note (ETN) based on bitcoin. The latest move is reflective of the broader shift in recognizing Bitcoin more for its technology and less as a currency or investment.
The development may be good news and bad news for other players that have already gotten started with such work. Overstock.com is seeking to create a “cryptosecurity” marketplace, and recently indicated in a filing that it aims to issue $500 million of its own securities through such technology. The Blythe Masters-led Digital Asset holdings is planning on building a secure facility for trading digital currency, but is also looking into digitizing traditional securities. If taking bets, one would pick the regulated, well-established financial player as best positioned to win the race. But at least the smaller players would be satisfied to know that their visions are being fulfilled somewhere and that society will benefit.
Nasdaq joins the growing list of financial heavyweights considering the adoption of blockchain technology, which now includes UBS, Bank of NY Mellon and USAA. India-based banking software provider Infosys is also examining the technology. Several other institutions have already adopted Ripple’s protocol for currency transfers.