Nasdaq’s Digital Assets Boss Explains Future Blockchain Assets

Last month, Nasdaq announced the release of its Marketplace Services Platform, a SaaS based multi-cloud platform offering for marketplaces.

On top of their Marketplace Services Platform is their Digital Assets Suite, a DLT agnostic offering aimed at providing clients with the ability to manage the full lifecycle of digital assets.  

I reported on this in a recent article for Forbes.com. This is a follow-up that provides a longer form write-up of my interview with Johan Toll, head of digital assets at Nasdaq Market Technology.

Jessel: Nasdaq has over a hundred and twenty clients across the broad spectrum of financial services providers. Where do you primarily expect see adoption of digital asset taking place? The large incumbent investment banks or the smaller digital asset focused neo-digital-challenger-banks?

Toll:  With the Marketplace Services Platform we are looking to meet the demand that we have seen out there. We are really providing an end-to-end platform to operate marketplaces across a variety of market models and industries. To that we have added one product suite that is very much focused on managing the complete digital asset lifecycle. 

This is very much about streamlining everything into one harmonized service that can meet the needs for the multiple stakeholders out there and I think we clearly see the demand to trade new types of financial instruments and assets.

We see demand from our classic market infrastructure operator client base and amongst incumbent marketplaces across multiple exchanges, pretty much spread globally, looking to see how they can potentially issue, trade and manage new types of financial assets. It’s less about moving existing asset classes into this new world, but it’s rather about identifying potentially existing bilateral manual trades going on in those asset classes. 

Additionally, we see demand in other industries beyond the capital markets where there’s an ask for institutional grade services for enabling marketplace to digitalize new types of assets such as the insurance industry, healthcare industry, betting industry, real-estate and commodity agriculture industry etc. wherever there is a need to actually more efficiently trade assets of value. 

Through the Digital Asset Suite we’re looking to serve the full digital asset lifecycle through one solution – from issuance to risk management, settlement and custody. All of that is done through a streamlined platform that we call the Marketplace Services Platform. 

That is the cornerstone for Nasdaq’s new offering, allowing clients to grow with their technology whether it’s a start up, or an incumbent. Once they get some speed and the business increases, our platform can scale with their growth and success both in terms of performance and scalability but also in terms of adding on additional business features such as market surveillance or risk management or adding in partner systems into this. 

Jessel: That’s interesting to see the focus on new asset classes as opposed to necessarily replatforming the existing legacy. The latter can be hard as the reality is that you rarely see systems retired in a bank, instead new systems are layered on top of old ones.

Toll: That’s true. Another perspective to this beyond managing the security and tokenizing it, is about looking into the liquidity side and the payment side of the ecosystem. I think once you can actually collapse two – security and payment – into one and the same service you reach a Nirvana, you could say.

Traditionally we see separate payment networks and we have separate security infrastructures. What blockchain and smart contracts can provide us with here is very much one complete service and a network to manage both the assets and the payment leg.

Jessel: That seems similar to the vision that the Paxos Settlement service has where they have tokenized cash so that they can do atomic swaps thereby removing settlement risk and the associated reserves that need to be held by broker dealers to manage settlement risk. With major broker dealers needing to have billions of dollars in reserve for that, eliminating settlement risk and getting down to immediate settlement frees up all the money.

Toll: Yes, indeed. And especially when you launch new ecosystems since we are looking to see what can be improved when we actually start to use these tools that come from blockchain and smart contracts. 

We can now have solutions that are designed to cryptographically guarantee that the delivery versus payment will occur and you don’t necessarily need a central operator to ensure that anymore.

Jessel: Within the tier 1 Wall Street banks, it’s younger generation of leader that are pushing the digital asset but in these conservative organizations there’s still a lot of institutional skepticism from the older guard at the top. Does that mean that it’s the more nimble tier-twos, or banks in more progressive places like Switzerland who are really able to commit to digital assets? 

Toll: We see requests broadly from both bigger players as well as other startups both within as well as also outside the capital markets. 

While we do encounter startups that see the opportunity that digital assets has for them to offer a much more efficient solution than the incumbent players, we do also see bigger players saying “o.k. what if we were to transform part of the ecosystem into the new world”, so I don’t really see a strong segmentation there. 

I think what’s important here to point out is that the discussion has primarily turned from being a technology focused one between technologists into a one that is a discussion and decision by the folks on business side, which is very good. That’s where the real money and the real interest will come from to motivate a real transformation of the ecosystem. 

And then of course people have to ask themselves; what is the real benefit of actually moving into this type of ecosystem, and what additional benefits do I get with this versus staying on my existing environments.

Jessel: And on that point around benefits. I have heard banks executives stating that digital asset technology can take out up to 95 cents in the dollar in lifecycle costs through streamlining of the process. Given each billion dollars of risk reserve costs a typical bank in excess of $20m in annual costs, that’s a huge save.

Are those kind of numbers consistent with what you are hearing? I guess it depends a bit depending on the type of asset.

Toll: In terms of the cost analysis, it very much depends on which ecosystem you’re trying to replace and they look very different from one to another. 

If it’s in the shipping industry, the health care industry, insurance industry, or in the capital markets, whether its OTC, bilateral, manual or telephone based, I think the cost opportunities or the cost savings are going to vary a lot depending on what ecosystem you are trying to transform and which legacy system you have. So it’s hard to point out a specific cost/investment point as it varies between industries. 

There are a lot of on-going discussions on the business side as to where the lowest hanging fruits to grasp are and where one should start to introduce a much more efficient streamlined service to provide to participants in the market.

Jessel: Having regulatory clarity around what licenses are required to own and operate a digital asset marketplace is going to be key for adoption. What are you seeing from the Nasdaq perspective here?

Toll: Everybody is now looking into how to move blockchain into covering institutional trading of digital assets. From my perspective, it’s important to continue to look to ensure that you have the necessary regulatory approvals and you have the readiness from the ecosystem in the market that you want to transform. 

The regulators don’t stipulate which technology you use here. Some might need to change eventually but I think the existing regulations out there are very good and I’m happy to see that most regulators around the globe have a very good understanding of the impact of moving into more decentralized distributed networks. 

It’s much easier nowadays to have fruitful dialogues with the regulators to ensure good processes and deployment. 

I think a lot of regulators across major countries have made good progress in ensuring that they have reports out there and that they have statements and thoughts around how they would respond to digitalization of securities as well as what is a security and what isn’t a security, utility and what is the crypto-currency and so forth..

There is much more clarity now, which is certainly helpful when we launch new technology products and services.  

Jessel: Continuing the regulatory thought, with some specifics; regulation around custody of digital assets in the U.S. continues to be a challenge given property law, re-hypothecation, bankruptcy laws and co-mingling of assets. Would you agree?

Toll: The discussions are centered around both custody and finality in the ownership and when the actual ownership is transferred. That’s why we are primarily focused on private permissioned networks where we believe you can much quicker reach the  regulatory approvals required for both the custody part as well as the very important finality of the movement of the assets.

Jessel: Turning to the competition now. When you look at similar platform in the space, such as Securrency, Securitize and Tokensoft that provide issuance and then management across the full lifecycle of Digital Assets. It’s quite a crowded trade in terms of a lot of platforms at the moment chasing not that much business now. How are you looking to differentiate or do you think there’s enough competition for everyone? 

Toll: I would say that from a Nasdaq point of view I think what we are looking to bring to the market is a financially graded service, trusted and delivered by Nasdaq. Nasdaq comes with a good stack of technology and platform that clients can grow and scale with.

We run and operate 28 markets ourselves across the U.S. and Europe and have delivered technology for 30 years, so we are very well known in industry of the capital markets as a trusted provider of services and technology. I think we clearly see that we have an edge there. 

Many of the dialogues that we have now are very much about the fact that when I buy a system or a service, I want to know that I can live with it and I can grow with it once my business is taking off. That’s essentially what our Marketplace Service Platform is about. You can start small and you can grow in terms of functionality and services that we deliver to the ones looking to set up a marketplace and digitize the tokens.]

We are a trusted market infrastructure provider and that’s important to remember. We really see a lot of traction now coming from start-ups that might have grown out of their current solutions and are now looking for a more financially graded solution that they know they can seamlessly scale their business with.

Jessel: Can you speak a bit more around the Microsoft Alliance that you mentioned in your press release? It mentions that your solution will be available on Azure and your partnership will look to power the next generation of digital assets but didn’t go into details beyond that?

Toll: What we are currently focusing on is that we want to become the the implementation partner to our clients who want to set up marketplaces and start to tokenize assets. 

And we are having a multiple DLT strategy here as we work with multiple DLT providers to ensure that we can choose the best of the blockchains given the business requirements by the client. 

And the same is on the cloud side with our collaboration with Microsoft. We ensure that we are a multi-cloud provider so we can pick and choose the best of breeds for the various use cases we have out there to serve our clients.

Jessel: Is there anything  else that it’s worth pointing out to our readers?

Toll: We see how the importance of the API economy is really starting to scale. Part of our ambition with our  Marketplace Services Platform is to enable easy access into our service through harmonized API’s so clients and customers can explore and properly integrate their solutions into the ecosystem we’re building up now under the Market Services Platform umbrella. 

It’s also worth bearing in mind that with Nasdaq’s Marketplace Services Platform you can start with one or two services or modules and then you can efficiently grow them as your business expands.

We have also added quite a lot of new style user experiences for the investors or the issuers coming on board as we see how increasingly important UX Design is for a seamless and value-adding experience.

Jessel: That makes sense. In financial institutions it’s so common to see operators having to swap between multiple systems because things were designed from a system perspective, not from the user experience point of view. New platforms have the opportunity to build new experiences from the user’s perspective.

Johan – thank you for sharing your time, thoughts and insights and best of luck with the new offering.