Nasdaq, the world’s second-largest stock exchange is now working with 7 different cryptocurrency exchanges by offering them proprietary market monitoring technology. The 7 exchanges now using the surveillance technology were carefully vetted and had to meet stringent criteria.
As reported by Forbes on January 30, 2019, just 2 of the 7 exchanges collaborating with Nasdaq have been named— Gemini, the licensed digital asset exchange run by the Winklevoss twins, and SBI Virtual Currency, a wholly owned subsidiary of SBI Holdings.
Nasdaq Chooses the Most Technically Capable and Morally Inclined Crypto Exchanges
Nasdaq’s proprietary market surveillance technology, which scans for fraudulent transaction patterns to ensure trading volume is free from fraud and manipulation, is not available to just any cryptocurrency exchange.
Crypto exchanges interested in Nasdaq’s collaboration must have a substantial amount of money, be technically capable, and be morally inclined to use their powerful software wisely.
Nasdaq has assembled a team of about 20 people to conduct elaborate due diligence to establish whether a crypto exchange that wants to use their technology exhibits these criteria. Exchanges who past their test and can afford the proprietary surveillance technology will be granted access to it.
During a briefing at Nasdaq offices, Forbes quoted Tony Sio, Nasdaq’s head of exchange and regulator surveillance, as saying:
“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.”
How Nasdaq Vets Crypto Exchanges
According to Sio, Nasdaq vets their crypto exchange clients by analyzing 3 categories: Business Model, Know-Your-Customer (KYC) & Anti-Money-Laundering (AML), and Exchange Governance & Controls.
Nasdaq’s team of about 20 legal and technical experts use these criteria and others to evaluate possible exchanges by asking a series of questions and evaluating the exchanges answers and evidence supporting them.
Regarding the “Business Model” criteria, one question that stands out is:
“How reputable are the products available to trade on the venue?”
This question allows Nasdaq to determine how the listed assets are being used, who is using them, are they even being used, etc.
It’s unclear how Nasdaq judges this question, but it’s interesting that they are concerned about how and who uses the assets. One could speculate that this could result in the clamping down on certain cryptos primarily used for illegal activities on the dark web.
Another interesting question, this time regarding the “KYC/AML” criteria is:
“What is the organizational structure and what are the founders’ backgrounds (i.e. tech expertise, financial markets expertise, etc.).”
This question shows that Nasdaq weighs past experience heavily. The prominent exchange only wants to work with highly reputable individuals and proven entities, hence the 2 announced crypto exchanges being run by the Winklevoss twins and the Japanese financial services giant, SBI Holdings.
As for the third and final criteria, “Exchange Governance & Controls,” a question that stands out is:
“Are crypto asset listing standards in place?”
This question ensures that only viable crypto assets get listed, and scammy and fraudulent assets are disregarded. Crypto exchanges such as the Circle-owned Poloniex exchange and Coinbase publicly post their asset listing process to ensure full transparency and authenticity.
As the cryptocurrency industry matures and more participants like institutional investors join the market, crypto exchanges will seek to capture their investment capital and lure them to their exchange. However, institutional investors will be very particular about which exchanges they trust and deal with.
Therefore, crypto exchanges that manage to partner with Nasdaq and utilize their powerful market monitoring technology will be an attractive option for institutional investors and other market participants.
Nasdaq’s technology is already tried, tested, and trusted, and newcomers will be far more inclined to trade with exchanges who use it.
How do you think crypto exchanges will adapt as the industry becomes more institutionalized? Will many crypto exchanges lose market participants and eventually fail? Let us know what you think in the comment section below.