Nasdaq bets on bitcoin's blockchain as the future of finance

The US stock-exchange Nasdaq is experimenting with incorporating the underlying technology of the bitcoin cryptocurrency into its pre-IPO trading arm, Nasdaq Private Markets.

The wing, a subsidiary of the company that focuses on assisting investment for firms that are not yet publicly traded, will begin to write a copy of its trades into the publicly available ledger of all bitcoin transactions, known as the “blockchain”.

In doing so, it hopes to “provide extensive integrity, audit ability, governance and transfer of ownership capabilities”, according to a release from Nasdaq.

Conventionally, cryptocurrencies such as bitcoin rely on the blockchain to free them from the centralisation of traditional finance. Traditionally, one trusted authority (usually a bank) holds an accurate ledger of how much money each customer has, and electronic transactions are made possible by rewriting the ledger of the sender and recipient simultaneously.

But bitcoin, with no central body, instead shares all the information about who holds what amongst every computer running the software, to create a public ledger, the blockchain. The blockchain is so called because it records every transaction in the currency’s six-year history, grouped into a continuous chain of approximately 10-minute long transaction blocks. Every 10 minutes, when a complex mathematical problem is solved, a new block recording all the latest transactions is added and the blockchain. It means that every bitcoin transaction is public, and no single authority can prevent a transaction from taking place.

The blockchain can also hold information other than just who spent what, however, and it is this feature which Nasdaq is using. The company will be creating “coloured coins”, appending special information to the blockchain indicating that a particular fraction of a particular bitcoin can be redeemed according to the terms written into it. That coloured coin can then be passed around just like a normal bitcoin, while preserving a record of who owns the asset it is linked to.

It’s akin to sticking a note on to a pound coin that says “the owner of this coin also owns 1% of HotNewStartup Inc.” – except that the note can never be removed, the ownership of the coin is always public, and the message doesn’t have to fit on a postage stamp.

Bob Greifeld, Nasdaq’s chief executive, said: “Utilising the blockchain is a natural digital evolution for managing physical securities. Once you cut the apron strings of need for the physical, the opportunities we can envision blockchain providing stand to benefit not only our clients, but the broader global capital markets.”

Bitcoin remains in use as a currency, with companies such as bitcoin bank Coinbase growing rapidly. That firm is now valued at $400m, and provides services such as online wallets, currency exchange, and merchant tools to customers who want to use bitcoin to buy and sell goods and services.

But with interest in the currency at a low point in its recent history leading to a corresponding slump in the price of bitcoin, many have begun to examine the use of the blockchain technology for other purposes.

London’s Eris Industries uses a spin-off of the blockchain to offer users a fully programmable decentralised database and web server, while San Francisco’s Hello Block lets developers build their own applications directly into the blockchain.