Nasdaq Selects Bitcoin Startup Chain To Run Pilot In Private Market Arm
Nasdaq OMX Group Inc. has named San Francisco-based startup Chain as its partner for a pilot, announced in May, to test Bitcoin technology for the trading of shares in private companies.
Founded in 2014, Chain provides infrastructure to financial institutions wanting to use the blockchain, which is the technology underlying the digital currency Bitcoin, in their products and services. The blockchain enables entities to digitally transfer money and other assets directly, securely and near instantaneously.
Nasdaq will be testing the blockchain in Nasdaq Private Market, which is a marketplace for pre-IPO trading of shares in private companies; launched in January 2014, it so far has more than 75 clients.
”We are excited about the potential impact of this new endeavor with Chain on the transaction process,” Bob Greifeld, CEO of Nasdaq, said in a statement, adding that the manual process of tracking shares can be overwhelming. “As blockchain technology continues to redefine not only how the exchange sector operates, but the global financial economy as a whole, Nasdaq aims to be at the center of this watershed development,” he said.
The first company whose shares will trade on the blockchain will be Chain itself in the pilot expected to launch later this year.
Managing the shares of private companies has long been an expensive, labor-intensive process involving lots of paper, as well as spreadsheets, lawyers and sometimes filing cabinets or bank vaults. Despite all the expense and effort, a lot of what is represented on those papers is often outdated, as employees are terminated or as they purchase the stock underlying their options.
In recent years, several companies have sprung up to offer software that manages a company’s capitalization table — a record of who owns what in a company — thereby replacing spreadsheets as well as paper stock certificates, paper options grants and paper convertible notes.
While the blockchain has an obvious advantage over paper for cap table management, it is also superior to software, says Adam Ludwin, Chain CEO. “It currently costs a lot of money to make sure there are no mistakes, even when you’re using [software], because there are human factors involved in the transfer, recording and valuation work around securities.”
The blockchain, in contrast, allows for every transaction to take place securely and be recorded on a public ledger, copies of which are held by computers all around the world and then continuously synced so that each ledger agrees with all the others about when money or assets have been transferred, how much, and which party sent and which received.
Let’s say a private company wanted to use the blockchain to issue shares to employees. It would send each employee a nominal amount of money (a hundred-millionth of a bitcoin), on which would be coded metadata stating how many shares of the company are being transferred along with it. If, later, employees wanted to sell all or part of those shares to an investor, a liquidity company could be created to hold the shares of all employees wanting to sell. They would then transfer their stock shares to that liquidity partner’s wallet, and investors could buy those shares. Each transaction would only move a tiny fraction of bitcoin encoded with the number of shares – not an amount in bitcoin equal to the value of the shares themselves. If the pilot goes well, the system could be rolled out to more private companies in Nasdaq Private Market and even the public exchange. Ludwin says the grand vision would be to apply it to mergers and acquisitions, to equity and debt, and to domestic and international markets.