Nasdaq Enters Crypto Business With Focus On Security

Nasdaq is taking its first steps into crypto services with an emphasis on security, entering the business with a custody product for bitcoin and ether aimed at institutional investors.

“We feel that custody is foundational to any other service that we build,” says Ira Auerbach, the newly named head of Nasdaq Digital Assets. “The ability to hold on to our customers’ funds in a safe, secure, scalable and accessible manner is a key launch point for anything else we do in the future,” added the former head of the Gemini exchange’s crypto prime brokerage.

Crypto custody is central not only to Nasdaq’s digital asset ambitions, but to the industry as a whole. Clients are required to place enormous trust in their custodians, a confidence that individual investors are skeptical of handing over. This wariness has given rise to the phrase “not your keys, not your crypto,” meaning that private keys – analogous to passwords for the accounts holding crypto funds – do not belong in the hands of intermediaries. Since institutions are unlikely to build out their own infrastructure to custody assets, they need to choose a partner prepared to take custody of institutional-sized cryptocurrency accounts.

When asked why clients would choose a traditional financial player instead of a crypto-native firm to take custody of their digital assets, Auerbach responded that Nasdaq is uniquely positioned because of its knowledge of what institutional clients need in order to use a financial product.

“We have a long history of working with these institutions, we know their pain points, we have products built internally to address these pain points,” Auerbach said. “We think we can make institutions much more comfortable and usher in a larger adoption of the ecosystem.”

In parallel with the custody service, Nasdaq is expanding its anti-financial crime technology to weed out money laundering, fraud and market abuse in digital assets. The advantage Nasdaq has is that the company has the capabilities to analyze potentially fraudulent behavior in both traditional markets and digital assets as well, says Valarie Bannert-Thurner, senior vice president of anti-financial crime technology at Nasdaq.

“The criminals don’t just operate on-chain,” Bannert-Thurner said. “What we’re trying to do is look at the risk and try to identify the actual players that are doing the scams or manipulating the markets and not be limited to on-chain or off-chain. We’re saying let’s look at it across.”

Bannert-Thurner says the knowledge Nasdaq has from its anti-crime business is translating into the world of crypto, even if the underlying technology looks different at times. “The actual scams are not that different from what happened before,” Bannert-Thurner said. “Money laundering is still money laundering, but done slightly differently because you have to find mechanisms to do it.”

Nasdaq sells its anti-financial crime technology as a service to clients like crypto exchanges. While the new custody product is a separate endeavor, it will have crypto-specific anti-financial crime technology built in. One of these protections includes screening details of where digital assets originated and where they are being sent. Typically, users are able to send cryptocurrencies to any address they like without the receiver having to agree, in the same way that anyone who knows where you live can send mail without your approval. This runs the risk of wallet spamming or a practice referred to as “dusting,” which became popular when addresses associated with crypto mixer Tornado Cash were sanctioned by the US Treasury. Individuals who had used Tornado Cash began sending small amounts of cryptocurrencies to the wallet addresses of celebrities like Jimmy Fallon to protest the sanctions. Nasdaq’s screening tool will flag funds coming in from a sanctioned wallet, for example.

Nasdaq’s entry into digital assets comes as other players including Blackrock and Fidelity are building crypto support. In August, Blackrock partnered with Coinbase to offer a private trust offering bitcoin exposure for institutional clients. Earlier this month, EDX Markets—backed by Charles Schwab
SCHW
Corp., Fidelity Digital Assets and Citadel Securities — launched with plans to trade select tokens this year. The increased investment in digital assets comes despite the market’s persistent volatility and top asset bitcoin’s price being down 59% year to date.

“The big firms are starting now, many of them are still exploring, but many actually already are working on moving into the space,” Bannert-Thurner said. “We certainly haven’t seen the full institutional participation yet by any stretch.”

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