Why Nasdaq will Start Offering Crypto Custody For Institutional Investors

Why Nasdaq will Start Offering Crypto Custody For Institutional Investors

Tal Cohen, Nasdaq's executive president and head of North American, recently announced that it will launch a new group dedicated to digital assets in a bid to attract institutional clients. The new group, will initially offer custody services for two of the biggest digital assets: Bitcoin and Ethereum. This is Nasdaq's first major push in the crypto industry, who even though it is the second-largest stock-exchange by trading volume, has always steered clear of the volatile crypto market. 

Read here: What is the difference between custodial vs non-custodial wallets?

Why is Nasdaq doing this?

One of the main reason that Nasdaq is pushing in this space is due to increased appetite for cryptocurrencies institutional and accredited investors have shown. Additionally, Nasdaq already has a solid infrastructure set to launch a crypto exchange. Nasdaq outsources its proprietary surveillance and trading software to crypto companies, including providing its matching engine technology to Bitstamp. 

Furthermore, the vast majority of advisors Nasdaq surveyed, either plan to begin allocating to crypto or increase their existing allocation to crypto. As demand continues to surge, advisors will be looking for an institutional solution to the crypto question that now dominates client conversations. Nasdaq's own study has shown that:

• 72% of active financial advisors would likely invest their client’s assets in crypto if there were a related spot ETF product in the U.S.
• 86% of advisors who have already begun investing in crypto plan to increase their allocations over the next 12 months
• 50% of advisors involved in crypto have already begun investing in Bitcoin futures ETFs, while 28% intend to start within the following year. 
• 69% of these advisors would consider using an index fund for broad exposure, followed by sector-specific index funds (57%), actively managed funds (52%), individual digital assets (40%), and high-yield funds (31%).

Furthermore, Jake Rapaport, Nasdaq’s Head of Digital Asset Index Research, has stated that over the last ten years, the focus of a large number of advisors has been to shift their assets to index funds. 

According to Rapaport, "The vast majority of advisors we surveyed either plan to begin allocating to crypto or increase their existing allocation to crypto. As demand continues to surge, advisors will be looking for an institutional solution to the crypto question that now dominates client conversations." 

Regulation and Future Growth Opportunities...

This not a done deal yet and there are even larger plans afoot by Nasdaq. Firstly, Nasdaq is awaiting approval from the New York Department of Financial Services to become a registered custodian of digital assets. Secondly, Cohen has eluded to Nasdaq possibly becoming a crypto exchange in the future, if the regulatory environment and competitive landscape allow it.  

Cohen also believes that this would lead to future growth for the firm, “Off the back of custody, we can start to develop other solutions, offer execution services, liquidity services, and think about how we support new markets.”.

The Competition is heating up!

Nasdaq's digital asset custodial offering will make it a direct competitor to Coinbase, Anchorage, and BitGo. The company has hired the former prime broker services lead at Gemini Ira Auerbach, to lead the new Nasdaq Digital Assets unit. Auerbach said that Nasdaq was open to exploring partnerships and deal opportunities with crypto-native firms, but had no acquisition plans. 

This is important as other financial institutions are ahead of Nasdaq when it comes to partnerships. BlackRock Inc. partnered with Coinbase International Inc. to make it simpler for traders to commerce Bitcoin and shortly after provided its first funding product straight within the token. EDX Markets, a brand new trade backed by Charles Schwab Corp., Constancy Digital Property, Citadel Securities and Virtu Monetary amongst others, will begin buying and selling some tokens this year.

The so what then?

Like it or not, crypto is headed for mainstream. Yes, the birthing pains are there, but the evolution is inevitable. As parallel technologies start to mature and transactions times + cost for crypto reaches par with stable assets, the switch from paper or current transactional technologies to digital assets is imminent. Nasdaq and others are simply positioning themselves to succeed as the evolution reaches its apex.