Nasdaq OMX Group Inc. is testing a new use of the technology that underpins the digital currency bitcoin, in a bid to transform the trading of shares in private companies.The experiment joins a slew of financial-industry forays into bitcoin-related technology. If the effort is deemed successful, Nasdaq wants to use so-called blockchain technology in its stock market, one of the world's largest, and potentially shake up systems that have facilitated the trading of financial assets for decades.
"Utilizing the blockchain is a natural digital evolution for managing physical securities," said Nasdaq Chief Executive Robert Greifeld. He said the technology holds the potential to "benefit not only our clients, but the broader global capital markets."
Nasdaq will start its pilot project in Nasdaq Private Market, a fledgling marketplace launched in January 2014 to handle pre-IPO trading among private companies. The platform has more than 75 private companies signed up, according to the company.
Private companies typically handle sales and transfers of shares with largely informal systems, including spreadsheets maintained by lawyers who verify transactions by hand. Nasdaq wants to replace that process with a system based on bitcoin's blockchain technology.
The blockchain ledger is seen by some in the financial industry as the most compelling aspect of bitcoin because it can be used beyond merely buying and selling goods or services with a new currency.
The blockchain is maintained, updated and verified by a vast global network of independently owned computers known as "miners" that collectively work to prove the ledger's authenticity.
In theory, this decentralized system for verifying information means transactions need no longer be channeled through banks, clearinghouses and other middlemen. Advocates say this "trustless" structure means direct transfers of ownership can occur over the blockchain almost instantaneously without the risk of default or manipulation by an intermediating third party.
One idea is that encrypted, digital representations of share certificates could be ; INSERTed into minute bitcoin transactions known as "Satoshis," facilitating an immediate, verifiable transfer of stock ownership from seller to buyer.
Still, bitcoin-based settlement remains untested in the real world. Regulators worry about the anonymous status of the bitcoin miners that collectively manage the system. It is conceivable that bad actors might one day take over the mining network and destroy the integrity of its verification system, some say.
Also, bitcoin's underlying software is unable to handle the massive increase in data storage that a Wall Street settlement system would require. While the software could simply be updated, implementation will require consensus among the many, far-flung miners.
Nasdaq Private Market is also a relatively small project for Nasdaq so any changes there aren't far-reaching. At the same time, the experiment is the latest example of large financial firms exploring the use of the technology.
In recent months, the New York Stock Exchange unit of Intercontinental Exchange Inc. announced an investment in the bitcoin-trading platform Coinbase; Goldman Sachs Group Inc. invested in bitcoin consumer- services company Circle Internet Financial; and big trading firm DRW Holdings LLC said a subsidiary had "begun to experiment with cryptocurrency trading."
Meanwhile, Digital Asset Holdings, led by former J.P. Morgan Chase & Co. executive Blythe Masters, is, like Nasdaq, developing a blockchain-based system for settling transfers of securities and funds.
Some see the blockchain as a way to attain a long-held securities-industry goal of real-time settlement, shifting the current "T+3" structure, in which the final transfer of funds and securities occurs three days after each trade, to "T+0."
Real-time settlement has been a goal of regulators and investors alike as it would reduce the risk of counterparty failure and free up billions of dollars of capital that is sidelined during that wait period.
Oliver Bussmann, chief investment officer of Swiss bank UBS AG, last year said the blockchain was the biggest disrupting force in the financial sector, meaning its success could potentially have far-reaching ramifications for banks, trading houses and others. His bank has since established a special blockchain lab to study uses of the technology.
Nasdaq named Fredrik Voss, a vice president, as its new "blockchain technology evangelist" to lead efforts to increase use of the technology.