Nasdaq, the architect and provider of the world’s most widely adopted market infrastructure technology and services, recently announced a partnership with distributed ledger technology provider R3.
It’s an interesting development that provides a signal to U.S. institutional investors that with a major exchange throwing its weight behind digital assets, the market may now be mature enough for them to fully embrace using blockchain to issue and trade financial securities.
Nasdaq may be best known for powering the traditional technology focused stock exchange that rivals the New York Stock Exchange, however what is less well known is that it is a major provider of mission-critical market infrastructure solutions across the trade lifecycle to 120+ marketplaces, clearinghouses, central securities depositories and regulators, including several digital assets exchanges.
In other words, Nasdaq’s technology powers the financial markets and is everywhere.
With its partnership with R3, Nasdaq, through its “Market Technology” arm will now be able to provide solutions that use R3’s Corda technology as they help their clients move from traditional ways of issuing, trading and settling financial instruments to new blockchain enabled mechanisms. With so many institutional clients today, Nasdaq is uniquely positioned to play a critical role in bringing about the revolution of digital asset technology.
I recently sat down with Johan Toll, Head of Digital Assets, Market Technology and Todd McDonald, Head of Partnerships and R3 co-founder to learn more about the exchange’s plans and their vision for the R3 platform.
For Toll, the partnership with R3 is a continuation of a long term digital asset technology adoption strategy. Since the early days of blockchain, Nasdaq has been an early and eager adopter of the technology; in 2015 it partnered with blockchain provider Chain to power its private securities platform. Then in 2019 the exchange giant led a $20m investment in blockchain provider Symbiont technology.
“From a Market Technology perspective, we continue to invest in technology that furthers Nasdaq’s capabilities to build and deliver solutions and services that support the entire lifecycle of a digital asset; from issuance and tokenization to trading, settlement and custody”, says Toll.
From Toll’s vantage point, the demand in digital asset technology appears to be booming – “we see a surging demand in this space both from the traditional capital markets and from participants outside of the financial sector. Traditional exchanges are looking at digitizing their assets and making them more accessible through DLT-solutions. In this case, our ambition is to build technology solutions that enable these firms to build their own digital assets marketplaces, in tight collaboration with R3.”
That’s an important data point from a technology company on the front lines of the adoption of adoption digital assets in the institutional segment of financial services.
Charting A Different Course
Nasdaq is taking a markedly different approach than other exchanges that have been early adopters of blockchain technology. Whereas Nasdaq is looking to help other companies to build and adopt solutions that they will use themselves to issue, trade, settle and custody digital assets, other exchanges have instead sought to use the technology internally to enhance their own exchange operations.
For example, the Swiss Stock Exchange has established a near monopoly in the digital asset secondary market space in the country by operating a digital exchange (the Swiss Digital Exchange, incidentally, is also powered by R3 Corda), which is a venue for investors to buy and sell digital securities.
Whereas the Australian Stock Exchange (ASX) is using Digital Asset’s smart contract technology and VMWare
Nasdaq’s approach to empowering the financial industry with tools that help institutions digitize assets themselves may appear to be more altruistic than the strategy adopted by their Swiss and Australian peers who want to own and operate the digital asset value chain themselves. However, it’s worth bearing in mind that with a captive audience of over 120 existing clients, Nasdaq can make a lot of money from servicing these clients with asset digitization technology. Potentially that’s even more lucrative than owning and operating a digital asset exchange themselves.
It’s All About The End to End
Toll emphasizes that they are looking at powering the digital ecosystem end-to-end, as opposed to taking one piece of the whole ecosystem — such as as purely focusing on the exchange element.
For R3 founder and head of partnerships Todd McDonald, that approach to working across the end to end lifecycle in digital assets is crucial as without that capability large financial institutions will struggle to adopt digital assets. As is the importance of well known infrastructure providers stepping into the fore to provide credible and trusted services in the digital asset space.
“Two years ago, we at R3 had a thesis around digital assets which is now starting to play out,”, says McDonald, “and in order for digital assets to gain adoption, it has to be integrated into professional venues to reach institutional grade investors and be architected for these institutional investors”.
It’s not just R3 who are being vocal about the criticality for an end to end solution to attract institutional players. Swiss neo-bank SEBA, which recently announced a partnership with Tokensoft to bring end to end digital asset services to the market has also echoed that view, highlighting the importance for institutional investors to have an end to end fully audited service for digital assets.
Corda As The Defacto Platform?
Toll is enthusiastic about the partnership with R3, stating that “the Corda platform will fit well into Nasdaq’s technology ecosystem and partnership strategy and allow [the organization] to harness the power of scalable design and a new level of interoperability.”
Corda, is a natural choice for Nasdaq given that its technology stack been built in partnership with financial services providers. The team has focused on aspects of the technology that is important to institutional investors, such as scalability as well as ensuring that it provides legal settlement finality — something that public blockchains typically cannot provide (especially Proof of Work based ones).
From McDonald’s perspective, Corda has already become the defacto platform of for institutional trading digitized assets — “if you are looking to a shift to institutional assets, Corda is becoming the standard,” says McDonald, adding “the market will start to coalesce around a handful of platforms, and only a few will emerge.”
As evidence, he points to a recent large scale deployment of Corda in Italy where 32 banks have gone live, using distributed ledger technology to remove the manual processes of interbank reconciliation. “That’s not a PoC, it’s production stuff”, says McDonald, indirectly taking a swipe at the common accusation leveled at blockchain that nothing ever seems to get out of Proof of Concept in the world of enterprise blockchain.
Is McDonald right to claim that Corda has become the de-facto standard?
Certainly, Corda has made some significant inroads into the financial services ecosystem; Corda powers a number of large trade finance consortia, a liquid asset collateral exchange, Switzerland’s Digital Asset Exchange, the DTCC’s Trade Information Warehouse, and a number of insurance consortia.
That said, there are enterprise blockchain plays in the financial market which have achieved some traction, for example Axoni has established a foothold in the derivatives and securities lending space as well s being a partner with R3 in the Trade Information Warehouse project. Symbiont has also had some notable traction in the fund management space. IBM has a presence in financial services, particularly in payments and currency swaps. Digital Asset has also achieved traction with their implementation with the Australian Stock Exchange (ASX).
While it’s unclear what the “few platforms”, that the industry will coalesce around, R3, Axoni, Symbiont, Digital Asset and IBM Hyperledger Fabric appear to be the top ones in financial services.
While Nasdaq is clearly excited about its collaboration with R3, that doesn’t mean that the exchange giant is walking away from its partnership with — and investment in — the aforementioned Symbiont.
That’s because “Nasdaq is ‘blockchain agnostic’ ”, explains Toll, “meaning that we partner with several blockchain providers and we have partnered with both R3 and Symbiont for different purposes. While R3 will certainly play an important role, Nasdaq remains agnostic and we continuously collaborate with different blockchain providers. Our ambition and overall strategy is to ensure that we have solutions and partnerships that meet the unique needs from our clients and their business requirements…..importantly, we will continue to partner with companies that help us develop and deliver according to our clients’ needs and requests – that is always our main focus.”
Toll wouldn’t be drawn on where Nasdaq would choose to use R3 over Symbiont or vice-versa stating only that “our overall strategy is to partner with them both in order to cater to different client needs when developing digital assets solutions for the capital markets.”
Certainly Symbiont has strong traction in both the fund management and currency swap space, having successfully deployed their technology at fund management giant Vangard
Symbiont technology technology also powers Synaps which is a blockchain enabled syndicated lending platform serving the $1trn+ bank lending market. The company also has a partnership with “father of securitization” Ranerei partners, a leader in the mortgage securities space, leading some commentators to speculate that the organizations may jointly launch a blockchain enabled digital mortgage product.
A Maturing Ecosystem
Nasdaq’s efforts in supporting the adoption of digital assets is one of a number of recent examples of how the world digital assets has increasingly started to look as though it is ready for prime time.
It seems that the overall market sentiment towards blockchain in financial services has enjoyed something of a renaissance since the dark days of 2018 when discouraging comments from organizations such as Deutche Bourse suggested that in trials blockchain had actually increased cost, and complexity and slowed performance.
Some of that may be because the financial industry needed to take some time to work out where blockchain is, and is not suitable for being used. That’s the view that McDonald supports -“It has taken a while for the financial industry to understand the use cases of blockchain. The industry has now reached a point where the technology has matured along with the viewpoint around how to use blockchain in the most appropriate way”.
Certainly, digital asset adoption in Wall Street appears to have kicked in to high gear this year with a number of high profile projects backed by large recognized infrastructure providers going live over the last six months.
February, for example, saw the launch of a blockchain based equities settlement service by the Depository And Clearing Company (DTCC), an entity that settles over four quadrillion dollars worth of securities, daily.
In March, the Options Clearing Corporation signed a deal with Axoni to move its stock lending infrastructure which supports over $72bn of stock lending over to the company’s distributed ledger technology.
A month prior, Axoni also announced that fifteen of the leading sell-side and buy-side firms in the equity swaps market, were now using a distributed ledger network built using Axoni’s technology to manage equity swap transactions.
Paxos also announced, in February, the go-live of an equity securities settlement service with Instinet and Credit Suisse that uses digitized dollars and equities using their distributed ledger technology, Bankchain.
And finally, in the last few days DTCC has announced two projects – Ion and Whitney, the former being an effort to use distributed ledger technology to improve the settlement process and the latter being an approach to provide an end-to-end service for digital assets.
Whitney, in particular is notable given that it is focusing on establishing an end to end digital asset processing capability. With the two different approaches from major infrastructure providers; the DTCC seeking to offer a vertically integrated digital asset platform, and Nasdaq looking to work with financial infrastructure providers to help them build out their own asset digitization offerings, it’s gearing up to be an interesting year in the digital asset world.