Why is Nasdaq betting on the Bitcoin blockchain?

As the most eye-catching application of Bitcoin at present, its public transaction records will help start-ups track shares and shareholders.

—— Mike Orcutt 2015.7.9

It’s still too early to say whether Bitcoin is the future of money, but a recent experiment conducted by Nasdaq will tell us whether Bitcoin is the future of financial record keeping.

Nasdaq recently announced that it has begun experimenting with blockchain. The blockchain is a publicly accessible, cryptographically verified ledger of every bitcoin transaction that has ever taken place. Transactions are verified and recorded by a network of "miners" around the world. Miners compete for the chance to solve a complex cryptographic puzzle, earning the right to record transactions and mint new coins. Nasdaq will adopt a design advantage of bitcoin that allows additional information to be recorded on the blockchain along with bitcoin transactions.

Nasdaq is trying to apply this feature of blockchain to streamline financial accounting, making it cheaper and more accurate. Although the company said that this innovation of Bitcoin could eventually be used to record stock trading records of Nasdaq publicly listed companies, they will first focus on the newer free market platform to provide services connecting private companies and investors. In such an example, the accounting through blockchain will form a cloud-based data management tool that will be able to track who holds a company's stock and how much they hold.

Tracking a company's ownership structure is a complex, time-consuming, and expensive task, especially for fast-growing startups eager to attract new investors. In many cases, companies manage their own data using spreadsheet programs like Excel, and have to pay lawyers to notarize the information every time a change is made to the spreadsheet.

Meanwhile, Nasdaq’s CIO Brad Peterson said:

“Errors in this kind of record keeping are very costly. There really is no perfect system that can guarantee that (the spreadsheet) is always correct and auditable from the initial change to the subsequent changes. Brad Peterson and his colleagues at Nasdaq believe that blockchain is essential for such a system.”

To understand how this works, imagine an employee wants to sell some of his stock holdings. Nasdaq's existing service will match those shares with an investor who wants to buy them, complete the transaction, and update the company's record of stockholders. Now. For the same new company using blockchain, a "corresponding entry" will be generated in the Bitcoin transaction, which will include important information specific to the transaction, such as the transaction time and the number of shares involved. Last month, Nasdaq announced a partnership with Bitcoin startup Chain to help Bitcoin technology be applied in this field.

Adam Ludwin, founder of Chain, said that the beauty of storing high-value information in the blockchain is that it does not require people to trust any single entity to accurately record information. A company may go out of business or change hands, but the blockchain is an indestructible record that everyone can see and reach a consensus on.

Chain is one of the first companies to partner with Nasdaq on a blockchain project (other companies have not yet been officially announced) and is helping Nasdaq determine how to represent company shares on the blockchain. It is also developing a blockchain reader application that will allow companies and individual shareholders to read specific information they can access through encrypted private keys.

Peterson said Nasdaq will explore opportunities presented by blockchain technology in other areas of its business, a large part of which is providing the underlying technology to various stock exchanges around the world. However, one potential problem with this is that there is an undecided debate among Bitcoin Core developers about how to modify the software so that Bitcoin can accommodate the increased trading volume.

Peterson also said that in addition to Chain, the earliest adopters will include a small number of companies and investors who support the industry because they are in it. If things go well, the plan is to expand this project to other small startups that have a "natural affinity" for securities accounting. Peterson emphasized that we believe that information security companies will see the superiority of blockchain technology and will soon show us their foresight.

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