XRP yesterday joined Bitcoin and Ethereum in having its price tracked on Nasdaq’s Global Index Data Service (GIDS). This is the latest of many steps that the world’s second-largest stock exchange has made toward embracing cryptocurrency.
Nasdaq CEO and President Adena Friedman wrote on LinkedIn in January that cryptocurrency is “a tremendous demonstration of genius and creativity” which “deserves an opportunity to find a sustainable future in our economy.” Recognizing the contradiction between Bitcoin’s origin as an anti-establishment alternative to centrally-controlled currency and investors’ desire for regulation and oversight, Friedman wrote that Nasdaq is “working to help cryptocurrencies gain investors’ trust by offering our technology for trade matching, clearing, and trade integrity to start-up exchanges.”
Seven cryptocurrency exchanges have so far received Nasdaq approval to use its market surveillance software to help build trust among investors. In December, Nasdaq Ventures contributed to a $27.5 million fundraising round for institutional crypto spot and futures marketplace ErisX. In January, the DX.Exchange went live, allowing users to trade both cryptocurrencies and tokenized stocks in Nasdaq-listed companies such as Google, Amazon, and Facebook, utilizing Nasdaq’s Financial Information Exchange protocol.
A Bitcoin ETF has long been stated as coming to Nasdaq in the first half of this year, pending approval of the U.S. Commodities Futures Trading Commission (CFTC). And there are persistent rumors that direct trading of Bitcoin and other cryptocurrencies will be coming to Nasdaq in the near future, further exposing cryptocurrency to institutional investment.
So how important is Nasdaq’s support for cryptocurrency? And what form is that support going to take?
XRP’s 5.6% Nasdaq Bounce: Why Does Index Listing Matter?
XRP saw an immediate price rise in response to its inclusion among the 4,000 plus indices listed on Nasdaq’s GIDS, moving from a low of $0.294 to a high of $0.3115 in the 24 hours following the announcement. The Nasdaq tracking is not the only big news to hit XRP this week. On April 24, Saudi British Bank (SABB) announced it was the latest major bank to utilize XRP to facilitate high-speed cross-border payments. And on April 30, XRP was added to social investment platform eToro’s recently-launched eToroX cryptocurrency exchange. XRP’s inclusion on Nasdaq’s GIDS is a further step toward legitimizing it in the eyes of institutional investors.
Nasdaq’s GIDS provides real-time price tracking across a diverse selection of asset classes, allowing investors to track their portfolio’s performance. For Bitcoin, Ethereum, and XRP, GIDS uses price data provided by New Zealand-based Brave New Coin (BNC), which aggregates real-time prices from what it describes as “a comprehensive, global sample of liquidity on the highest volume and quality exchanges.” These exchanges currently include Bitfinex, Bitstamp, Kraken, and Poloniex, with Coinbase “to be added in the next review.” Although Binance is typically ranked as the largest cryptocurrency exchange by volume, it isn’t included in BNC’s calculations as it doesn’t yet offer direct US Dollar purchase of cryptocurrencies.
The data available on XRP, Bitcoin, and Ethereum through GIDS includes 30-second spot pricing, end-of-day Open-High-Low-Close-Volume (OHLCV) reports, and averages weighted by time and volume. The availability of this data on GIDS brings these cryptocurrencies in line with other asset classes and removes much of the uncertainty investors may have surrounding them.
Our article on the launch of Bitcoin and Ethereum indices in February included quotes from BNC CEO Fran Starjnar, who said that BNC “fully embraces” the “goals of addressing the obvious conflicts of interest in the benchmark-setting process, which the nascent crypto industry is vulnerable to.”
Cryptocurrency traders typically rely on sites such as CoinMarketCap and CoinGecko to track cryptocurrency prices across exchanges, but these are not always totally accurate or reliable. Both platforms feature different calculations for the circulating supply and market cap for some of the top-listed cryptocurrencies. They also allow exchange volume to be filtered by “reported” and “adjusted” volume, suggesting inherent unreliability in the figures which many cryptocurrency exchanges provide. And they have in the past made sudden changes went sent shockwaves through cryptocurrency markets, such as CoinMarketCap’s decision to exclude inflated prices from Korean exchanges in its calculations back in January 2018, which was a major contributor to the end of 2017’s wild crypto bull run.
Such sudden shocks are anathema to institutional investors and volatility has long been one of competing cross-border payment processor SWIFT’s main arguments against adoption of XRP by major banks. Starjnar states that a “crypto derivative wave is inevitable,” with “a rush to produce all manner of financial instruments, which the institutional users have been asking for, for almost 3 years now.” GIDS tracking of cryptocurrencies is one important development in this area, but it’s likely there are bigger steps to come.
Nasdaq-Powered Cryptocurrency Exchanges
Friedman describes “governance and regulatory clarity” as the “two key ingredients to establishing a practical utility and a more stable value” for cryptocurrencies. It’s arguably a lack of governance and clarity that actually helped cryptocurrency first rise to prominence, with Bitcoin’s early ascent largely linked to its use on darkweb marketplaces like the Silk Road. But as Bitcoin’s value rose, the risks of a lack of governance over exchanges have been exposed time and time again.
For the first few years of Bitcoin’s existence, Mt. Gox was the world’s largest cryptocurrency exchange by a large margin, accounting for over 70% of global bitcoin transactions. Most know of the 2014 hack of 850,000 BTC that sent Bitcoin’s price plummeting from above $1,000 to $230 over the following year, but Mt. Gox had been affected by several smaller incidents during the time it was active. More recently, the death of QuadrigaCX founder Mark Cotton resulted in the loss of access to $130 million in cryptocurrency assets. There have been countless such security incidents affecting exchanges large and small in the ten years since Bitcoin was created.
And there are other trust issues affecting some of the largest cryptocurrency exchanges. Bitfinex and the Tether stablecoin have dominated recent headlines amid reports of a New York Attorney General investigation into an alleged cover-up of $850 million in missing funds. And the recent launch of Binance’s Binance Chain was followed by accusations that it is abusing its position as the dominant crypto-to-crypto exchange to push projects toward migrating to its new platform.
Nasdaq is at the forefront of efforts to bring the “governance and regulatory clarity” that would eliminate the security risks and other questionable practices long associated with cryptocurrency exchanges. A key part of this is its SMARTS market surveillance system, which has so far been adopted by seven cryptocurrency exchanges. As per Nasdaq’s website, SMARTS is aimed at automatically detecting, investigating, and analyzing “potentially abusive or disorderly trading” through “a risk-based discovery approach that provides deep information on an individual’s behaviors in the context of market conditions, peer groups and their own individual norms – allowing users to uncover abusive behaviors and people that are more likely to manipulate the market based on their actions.”
Market manipulation is a fact of life in cryptocurrency, with low volume coins targeted by “pump and dump” groups and even Bitcoin’s meteoric rise in 2017 being attributed by a University of Texas study to large-scale market manipulation using Tether. That widely-shared study claimed that 50% of Bitcoin’s rise and 64% of the rise in other cryptocurrencies during the 2017 bull run was caused by unusual transactions made using Tether – transactions that would likely be flagged by Nasdaq’s SMARTS surveillance system.
Nasdaq also brings this focus on “oversight and clarity” to deciding which exchanges receive approval for use of its SMARTS surveillance tools. As Nasdaq’s Head of Exchange and Regulator Surveillance Tony Sio explained to Forbes, Nasdaq considers three factors before approving an exchange to use the system: Business Model, KYC/AML, and Exchange Governance & Controls. “Business Model” includes analysis of the legitimacy of products offered on an exchange, and “KYC/AML” focuses on compliance with Know Your Customer and Anti Money Laundering policies. The last factor – “Exchange Governance & Controls” – includes things such as how transparent the listing process is for an exchange. While exchanges including Coinbase and Poloniex have publicly published their process for listing new cryptocurrencies, other exchanges have a far less transparent listing process. Binance is moving toward greater transparency in this area, but in the past it has been accused of charging hefty listing fees for inclusion on its platform.
Exchanges named by Sio as receiving approval to use SMARTS include Japanese financial giants SBI Holdings’ SBI Virtual Currencies and the Winklevoss Twins’ Gemini exchange. The reaction to a Gemini marketing blitz in New York earlier this year shows how uneasy the relationship is between cryptocurrency’s anti-authoritarian outsider roots and the increasing push toward “oversight and clarity.” The marketing campaign saw slogans such as “Revolutions Require Rules” and “Crypto Without Chaos” brought much criticism from long-term cryptocurrency supporters. One users’ response in a Reddit AMA that accompanied the marketing campaign sums up much of the antipathy within cryptocurrency communities to increasing regulatory oversight: “”Marketplace Surveillance” sounds like exactly what it is … You’re recreating the exact same problems Bitcoin was meant to solve and it’s heartbreaking to watch you (and others) do it.”
Aside from market surveillance, Nasdaq is enabling other interesting developments within the cryptocurrency space. The Estonia-based DX.Exchange allows users to purchase both cryptocurrencies and tokenized securities in major companies with Euros on its platform. A series of Tweets announcing its January launch focused on the many major companies whose tokens would be available to purchase on the platform. DX.Exchange uses Nasdaq’s Financial Information eXchange (FIX) protocol, which allows for securities to be traded on the platform of any Nasdaq market participant. The exchange is not available to users in the United States, but it seems likely that Nasdaq-approved US exchanges like Gemini will want to incorporate such features in the future. We wrote back in February that many are predicting Security Token Offerings to be “the next big thing” in crypto. Nasdaq are likely to be the forefront of making those predictions a reality.
Have you been waiting for https://t.co/gavrewTi9F Digital Tokenized Stocks ? Well wait no more and make sure to watch the video below to get the full breakdown! #exchangeyourway pic.twitter.com/gMK4CVZQdE
— DX.Exchange (@DXdotExchange) January 6, 2019
Incidentally, shares in what CoinDesk describes as “a little-known Bitcoin miner” based in Oklahoma were suspended on Nasdaq around the same time the XRP index went live on GIDS. The suspension of trading was prompted by a SEC investigation into the small-time crypto exchange and mining company, known as Bitcoin Generation. And another minor news story making the rounds recently regarded one Twitter users mistaken belief that he bought Bitcoin directly through Nasdaq. The purchase was later attributed to a paper trading test on Bitcoin trading offered by TDAmeritrade. But could the real thing be coming soon?
BREAKING: BTC is now being traded on the Nasdaq! I bought one BTC through my TDAmeritrade account! According to the chart it started trading April 10, 2019!! Other digital assets are soon to follow!! 🚀🚀🚀 pic.twitter.com/1VgE1Whoa4
— Cryptopolis (@cryptopolis_x) April 22, 2019
UPDATE: According to TDAmeritrade support – it's not a real trade in my account – it appears they are testing only using their Paper Trading platform. Support said "I'm not able to speak on it" -They did not know what CXERX is. Strange… But something is going on for sure! pic.twitter.com/gUxtHX0TNg
— Cryptopolis (@cryptopolis_x) April 22, 2019
Nasdaq and Cryptocurrency Futures
Nasdaq was established in the 1970s but really rose to prominence as it embraced tech companies such as Microsoft and Apple, exploding in the late-90s tech boom and contracting sharply when the dotcom bubble burst in 2000. It is now most closely associated with the IPOs and tech stocks of major tech players including Apple, Amazon, Facebook, and Google. With a reputation built on new technologies, it seems natural that Nasdaq would embrace cryptocurrency.
The Winklevoss Twins have been pushing for some time to get a Bitcoin ETF approved by regulators in the United States, but have faced rejection due to the volatility of its price. The recent move toward tracking price indices of major cryptocurrencies is an attempt by Nasdaq to legitimize and stabilize their pricing and could easily be seen as a response to the Security and Exchange Commission’s (SEC) rejection of the Winklevoss Twins earlier ETF application. A Bitcoin ETF is still supposed to be coming to Nasdaq within the first half of this year. The listing of cryptocurrency price indices is a step toward making that a reality.
Nasdaq CEO Adena Friedman outlined two potential futures for cryptocurrency in her LinkedIn post back in January:
“It’s been more than a decade since bitcoin took the world by storm. With several thousand competing cryptocurrencies vying for investor attention, the world of “crypto” has gone through the first phase of the classic invention lifecycle, marked by early pioneers, followed by hype, followed by proliferation of newcomers and then a dose of reality. What comes next is one of two outcomes:
1) Either the innovation finds practical utility followed by years of steady and sustainable commercial progress and integration into the economic fabric (e.g., the Internet); or
2) The invention fails to achieve broad adoption and its commercial applications as medium of exchange are limited (e.g., the Segway).”
Nasdaq is currently being positioned to be at the forefront if and when Friedman’s first prediction of Internet-like “integration into the economic fabric” comes to pass.