Bitcoin technology comes to Nasdaq

Bitcoin technology comes to Nasdaq

NasdaqIt seemed only a matter of time before the technology behind Bitcoin known as the Blockchain would be tested by the financial markets. That time has come.

In a partnership announced last month, Nasdaq will enlist the services of Chain.com, a leading blockchain infrastructure provider, to facilitate the secure issuance and transfer of shares of privately-held companies using the blockchain platform.

There are currently 75 private companies within this new market for pre-IPO shares. Managing the shares of private companies has long been an expensive, inefficient, labor-intensive process involving lots of paper, lawyers, filing cabinets and sometimes bank vaults.

By using the blockchain to represent securities and manage capitalization tables, stockholders can seamlessly transfer securities between entities, and companies and their affiliates can be provided with a complete historical record of issuance and transfer of their securities. Importantly, the use of a blockchain-based distributed ledger can also offer integrity, audit ability, issuance governance and transfer of ownership capabilities – important qualities not yet offered in this Nasdaq-managed marketplace.

The first company to test this pilot program scheduled to be launched later this year will be Chain itself.

In recent years, many companies have sprung up offering software services to manage a company’s capitalization table. This software is certainly an improvement because its replacement of spreadsheets, paper stock certificates, paper options grants and paper convertible notes. But, it’s still software, and as such carries a high cost and the risk of human error in the transfer, recording and valuation work required for securities.

In contrast, the blockchain demands every transaction to be securely recorded on a public ledger, copies of which are held by computers all around the world. These ledgers are continuously synced so that each ledger agrees with all the others about when money or assets have been transferred, how much, as well as the sending and receiving party. Discrepancies are immediately identified and rejected by the system.

It is important to understand that the blockchain facilitates more than the recording of currency values. Anything can be recorded in perpetuity within the metadata of the blockchain including title history, ownership designations, terms and agreements – even wedding vows! Yes, this has been done.

Say, for example, a private company wanted to use the blockchain to issue shares to its employees. It would send each employee a nominal amount of money (a tiny fraction of a bitcoin). Encoded on the tiny bitcoin transfer would be the amount of shares being transferred to that employee. Because the details of that transfer would be recorded into the blockchain, no other records or oversight would be needed.

If the pilot goes well, the system could be extended to more private companies within the Nasdaq Private Market and even the public exchange. Chain CEO Adam Ludwin believes the ultimate vision is to extend blockchain technology to mergers and acquisitions, equity and debt, and to domestic and international markets – international currency transfers being a particularly prevalent use of bitcoin.

In another indication of the financial markets embracing blockchain technology, several major Wall Street institutions, including Goldman Sachs and the New York Stock Exchange announced investments in or partnerships with Bitcoin startups. As a number of long-time Wall Street players and financial regulators leave their positions to head up or join Bitcoin companies, look for cryptocurrencies and the blockchain to have an increasing visibility and important role within the world’s financial markets.

Is retail ready for today’s Bitcoin?

Is retail ready for today’s Bitcoin?

Bitcoin-retail-graphicIn a recent post, we outlined the basics of Bitcoin. While there is no doubt that this currency and its technological underpinnings are revolutionary, the obvious questions is: how is it best used?

Market forces have steered current Bitcoin use primarily as an international money transfer mechanism. Say, you want to send US dollars to someone in a third world country or vice versa. Rather than expose yourself to the high fees, regulatory stipulations, and overall hassle of making such a transfer (especially at a high monetary volume) Bitcoin provides a cheaper and more simple solution. It charges very low fees, provides far superior security, near anonymity, and with access to the internet, relative ease. It makes sense that Bitcoin is currently used for transactions in which there are high fees and a general uncomfortable level of “friction”.

So what about retail transactions?

Ease of use is one of the bigger challenges with Bitcoin or any cryptocurrency. Its no surprise, therefore, that infrastructure development is attracting the largest Bitcoin investment. Basic services are being built – exchanges, marketplaces, and wallets – the three core infrastructure components for bootstrapping a Bitcoin economy. Bitcoin is cool, but let’s face it, it’s not that easy to buy pair of pants at the local mall using Bitcoins.

Nonetheless, several major retailers are accepting Bitcoin including Overstock.com, Sears, CVS, Subway, 1-800-flowers, and Amazon. In fact, Overstock.com recently invested $5MM in blockchain technology specialist Peernova as part of its second tranche of Series A financing – a clear sign of Overstock’s belief in cryptocurrency benefits.

Bitcoin remains a relatively new technology, and as such, issues relative to retailer acceptance remain. Since the price of Bitcoin is in constant flux, for example, how does a merchant handle chargebacks? Buy a $2,000 flat screen TV today for 8 Bitcoins and return it for a refund next month for 8.2 Bitcoins? One solution being practiced is to provide the dollar amount back in Bitcoin rather than the actual Bitcoin amount, and do so in a store credit. And paying in person as apposed to online is not simple. Your phone with a QR code must be scanned at the register and that requires clerks to be well versed in the new technology. In my experience, clerks are just now coming to grips with Apple Pay!

Some good reasons for retailers to accept Bitcoin.

1. Much lower transaction fees. Perhaps the biggest reason that merchants have started accepting Bitcoin is because of the reduced costs relative to credit cards. The typical fee of less than 1% for Bitcoin beats the 3-5% charged by most major credit cards. With Bitcoin, merchants have the option to pay a fixed percentage or a periodic fee based on volume. Either way, Bitcoin acceptance could provide a material cost savings for major retailers.

2. Increased security. Retail doesn’t need to be reminded of the risks they incur holding its customer’s financial and personal data. Because there’s no personal financial information attached to a Bitcoin transaction, there’s nothing to intercept and no usable data to breach. Contrary to popular belief, however, Bitcoin transactions are not completely anonymous. Every transaction is contained within the publicly available blockchain, but if you follow some best practices for cryptocurrencies, your risk is greatly reduced over traditional credit card payments.

3. Quicker payment. With credit cards, a merchant’s cash can be tied up for a week or more and held in escrow in case someone asks for a refund. Every payment made with Bitcoin settles within moments of the transaction. The main delay is in the conversion process back to US dollars by a company like Coinbase or Bitstamp, but that usually takes only a day or two. It should be noted that merchants accepting Bitcoin are not holding on to the currency. They typically never touch the cryptocurrency which is simply channelled through these conversion companies who perform the backend functions of delivering the proper US dollar funds to the merchants. As these cryptocurrencies gain wider acceptance, it’s easy to imagine the major retailers buying or starting their own conversion operations.

4. Ease of international transactions. Many smaller retailers refuse to sell products internationally because of the high cost and effort to do so. As mentioned above, Bitcoin dramatically simplifies and reduces the cost of that process. With Bitcoin, merchants can accept payment from anywhere in the world at the speed of an email and at a fraction of the up to 8% fee for currency transfers and conversions.

Certainly there are considerations involved in accepting Bitcoin. But forward-thinking retailers must embrace the reality of cryptocurrencies and the opportunities acceptance brings to growing their bottom line and increasing their customer base.