Cryptocurrency exchanges that want to use Nasdaq’s proprietary surveillance technology will not be sufficient with just money.
A team of about 20 people contributes to an elaborated due-diligent process aimed at ensuring that any exchange that aims to use the technology, which scans for fraudulent transaction patterns, is technically capable and morally inclined to use the powerful software wisely and safely.
Exchanges that pass the test will be granted access to the same surveillance technology the mighty NASDAQ uses to verify to its clients that trading volume is as immune from fraud and manipulation as possible.
As of now, seven cryptocurrency exchanges have been able to pass Nasdaq’s muster so far. However, only two, Gemini and SBI Virtual Currency, were mentioned by name. As the cryptocurrency exchanges aim to lure new customers, Nasdaq’s technology is already being utilized to attract institutions and traders accustomed to more mainstream venues.
During an interaction on the state of the industry with members of media today at Nasdaq’s offices, Tony Sio, Nasdaq’s head of exchange and regulator surveillance, tried to tackle queries that every exchange dealing with cryptocurrency must answer.
“Historically, we don’t do such a large vetting process for our clients because they are much more well-known,” said Sio. “But as we started working with less well-known names, startups, then we realized we needed to do this check process.”
Sio gave a detailed presentation of how the company vets its crypto exchange clients, broken down into three categories: Business Model, KYC/AML, and Exchange Governance & Controls.
After the presentation, Sio explained the further context, explaining how Nasdaq’s team of legal and technical experts use the criteria and others to evaluate possible customers for risk. Not everyone can get lucky with Nasdaq, he said.
The first section of a document, “Key Questions to Ask When Evaluating a Cryptocurrency Exchange,” was called “Business Model.” One question in that section jumped out: “How reputable are the products available to trade on the venue?”
It is crucial as it would show Nasdaq is concerned about who is using crypto assets and how they are being used. As the pattern of usage of the crypto asset is very crucial, this issue will likely continue to become more critical.
The following section of the document is called “KYC/AML,” which stands for know-your-customer/anti-money laundering. Like the above point, this section relates to reputation. “What is the organizational structure and what are the founders’ backgrounds (i.e., tech expertise, financial markets expertise, etc.).”
The important part of the questions asked in the second section determines how the experience plays. From the early days of cryptocurrency, and now with other crypto-assets, the industry’s most significant value proposition was that it would democratize finance and a wide range of industries by allowing the retail consumers build and manage their own financial products.
As far as crypto is concerned, innovation would come not from the top down but from the grassroots. As Nasdaq has shown a willingness to work with some unusual clients in the crypto space, the ones we know about support what these questions reveal about Nasdaq’s interest in working with proven organizations, something other regulated exchanges and technology providers may follow.
The final section of the document has a question, “Are crypto asset listing standards in place?” On the one hand some of the largest cryptocurrency exchanges, like Circle (which owns the Poloniex exchange) and Coinbase, publicly post their new asset listing process, and on the other hand, others are much more opaque, leaving the door open to allegations of pay-to-play and other potentially fraudulent activity.
Recently, in June 2018, SBI Virtual Currencies, a Japanese financial giant SBI Holdings’ unit, announced it was using Nasdaq’s matching system. Prior to that, in April 2018, the heavily licensed Gemini cryptocurrency exchange, run by Tyler and Cameron Winklevoss, announced it was using Nasdaq’s SMARTS surveillance system. “Our deployment of Nasdaq’s SMARTS Market Surveillance will help ensure that Gemini is a rules-based marketplace for all market participants,” Gemini CEO Tyler Winklevoss said in a statement at the time.
Apart from facilitating technical support to these exchanges, Nasdaq’s interest in blockchain has been primarily limited to investing in non-cryptocurrency applications of the technology. Nasdaq, in 2015, joined a $30 million investment round in Chain, a blockchain start-up that eventually partnered with Nasdaq to launch Linq, a platform for issuing private equities. Last week, Nasdaq initiated a $20 million investment in Symbiont, another blockchain company building services that eliminate intermediaries in traditional financial workflows.
As the New York Stock exchange has partnered with Microsoft and Starbucks to launch its own cryptocurrency exchange, Bakkt, later this year, Nasdaq’s cryptocurrency exchange guidelines are likely to be limited only to providing technical support as of now.
“The objective that we’re trying to work with crypto, is we see this as a growing asset class,” says Sio. “So we’re working to help provide our technology—it could be around matching, it could be around surveillance—to help our customers as they grow their marketplaces.”