One indication that a nascent industry is definitely a long-term proposition is when heavyweights in the industry begin to get on board with the technology. News today from Forbes is that the Nasdaq is presently working directly with seven crypto exchanges by sharing its proprietary surveillance technology. One of the primary roadblocks that has prevented the SEC and others to embrace crypto exchanges is their concern related to price manipulation, including any and all forms of fraud connected with it.
The SEC has turned down over a dozen applications for a license to establish the first Bitcoin Exchange-Traded Fund (ETF). Industry enthusiasts firmly believe that a Bitcoin ETF could be the catalyst that would open the floodgates for both institutional investors and the general public at large.
Jay Clayton, Chairman of the SEC, has stated on occasion that he is “uncomfortable”: “What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation. It’s an issue that needs to be addressed before I would be comfortable. Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade.”
Nasdaq management feels similarly, the reason why they have a very strict vetting process for selecting crypto-related businesses that they will deal with in any way. According to Forbes: “Nasdaq has a team of around 20 people that work on due diligence processes for crypto exchanges ensuring that they adhere to strict reporting and security standards. Only seven crypto exchanges have passed this test and only two have been publicized: Gemini [a U.S. exchange owned by the Winklevoss brothers] and SBI Virtual Currency [owned by Japanese financial giant SBI Holdings].”
Tony Sio, the head of Nasdaq’s exchange and regulator surveillance team, shared these comments: “Historically, we don’t do such a large vetting process for our clients because they are much more well-known. But as we started working with less well-known names, startups, then we realized we needed to do this check process.”
The selection process is comprised of three risk assessment components:
Mr. Sio also mentioned that demand for its SMART surveillance system is increasing, but not everyone has passed its risk screening process. Nasdaq is especially concerned about continuing news of both volume and price manipulation in the crypto exchange industry. Sio reiterated that, “The objective that we’re trying to work with crypto, is we see this as a growing asset class. 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.”
Nasdaq has been no stranger in the past regarding the crypto environment. It recently joined funding round with Fidelity Investments to develop ErisX, a soon to be fully regulated crypto exchange. Forbes also noted in its interview: “In September 2015 Nasdaq joined a $30 million investment round in Chain, a blockchain startup that eventually partnered with Nasdaq to launch Linq, a platform for issuing private equities. Then, last week Nasdaq led a $20 million investment in Symbiont, another blockchain company building services that eliminate middlemen in traditional financial workflows.”
As heavyweights continue to join the crypto “team”, 2019 looks to be a turn-around year for cryptocurrencies and blockchain development projects.