If a cryptocurrency exchange decides that it wants to use a new surveillance technology owned by Nasdaq, they’re going to be required to pony up more than just money. Currently, a unit of around 20 members participates in a thorough due-diligence system to ensure exchanges are 1) ethically inclined to put the software to correct use, and 2) technically capable of doing so.
Exchanges who can afford the software and prove they can handle it, are then given access to the technology, which is the same that Nasdaq employs to validate its clients. This means their market quantity is as close to manipulation and fraud-free as possible.
So far, only seven exchange have passed the test. Only two, SBI Virtual Currency and Gemini, have been publicly acknowledged. As cryptocurrency exchanges aim to attract new users, Nasdaq’s technology becomes a must-have.
Typically, Nasdaq doesn’t perform such a thorough process for vetting clients since they are usually fairly well-known. However, as they have started to work with lesser-known names it became necessary to do their due-diligence.
Onboarding with Nasdaq
The company provided a detailed review of the method through which it onboards cryptocurrency exchanges. It breaks the process down into three areas: Exchange Governance and Controls, Business Model, and AML/KYC.
Nasdaq provided further clarity by explaining that its team of technical and legal specialists use the gathered information to evaluate whether or not a client is a risk. Not all potential customers make the cut.
The first part of the process is a section labeled “Key Questions to Ask When Evaluating a Cryptocurrency Exchange.” A key question which pertains specifically to cryptocurrency is “How reputable are the products available to trade on the venue?”
This question is interesting because it shows that Nasdaq does show concern regarding who is accessing the cryptocurrency and how it’s being put to use. But does the history of a digital asset matter? These types of questions continue to garner attention and will need sorting out by Nasdaq.
The second portion, labeled “KYC/AML” is about knowing your customer and anti-money laundering. A question that stands out in the section of the process asks “What is the organizational structure and what are the founders’ backgrounds?”
The question itself is interesting because it specifically asks about past experience. Cryptocurrency as a whole is all about letting customers manage or build their own products in the financial industry. The biggest value add of the industry is democratizing finances and other impacted markets.
With crypto, innovation begins at the grassroots. It doesn’t start at the top and work its way down. Even though Nasdaq has been willing to partner with unusual customers in the digital asset market, they’ll still have to answer and pass these types of questions to prove they are worthy of using the technology.
The final segment of the process asks “Are crypto asset listing standards in place?” There are exchanges who are very public about their process when it comes to listings. These include Coinbase and Circle. However, there are some who are opaque, who leave the option open for fraudulent activity and harmful allegations.
Last summer, SBI Virtual Currencies, which is run by SBI Holdings, shared that it would start using Nasdaq’s system. Prior to SBI Virtual Currencies, the Gemini exchange, owned by the Winklevoss twins.
Tyler Winklevoss shared with Gemini customers that “Our deployment of Nasdaq’s SMARTS market surveillance will help to ensure that Gemini is a rules-based marketplace for all market participants.”
While Nasdaq has shown interest in technology powered by blockchain, it has limited its investments primarily to non-crypto applications. In fall 2015, the exchange joined a round of investments in China that eventually led to the launch of Linq. More recently, Nasdaq led an investment round in Symbiont, which is a blockchain company that targets disrupting traditional financial processes.
Where the New York Stock Exchange is working with Starbucks and Microsoft to launch Bakkt later in 2019, Nasdaq is likely going to limit its involvement to technical assistance for its customers. The exchange views crypto as an expanding asset class, however, it aims to provide help to their clients as they develop in their respective markets.
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