Nasdaq announced this week that it would begin using a type of electronic ledger pioneered by Bitcoin, a popular and somewhat infamous digital currency. The technology is being tested on Nasdaq’s new and relatively limited Private Market, and does not actually use bitcoins as currency. Instead, Nasdaq will replicate Bitcoin’s underlying technological structure to keep track of its marketplace transactions.

Nasdaq is experimenting with a type of electronic transaction system
pioneered by Bitcoin. If successful, the system might eventually be used
for stock trading. Credit: © Matej Kastelic, Shutterstock

As a currency, Bitcoin is controversial. Its supporters promote Bitcoin as a liberating alternative to government-printed money, but its detractors note the currency’s instability and rampant use by criminals. However, even some of Bitcoin’s critics have recognized the potential of the currency’s robust technological foundation.

A bitcoin has value because it is linked to computer files called blocks. Taken together, all the blocks form a long, public record, called a blockchain. The blockchain, distributed over the Internet, forms the backbone of the Bitcoin system. All Bitcoin users have access to the blockchain, which is updated constantly with every bitcoin transaction. The blockchain is also encrypted, so that only proper transactions can interact with its ledger.

Nasdaq is betting that the idea of blockchain-based transactions will make its new marketplace more secure and easier to use. The Nasdaq Private Market facilitates trade between private companies before their initial public offerings. Such companies often handle such transactions “by hand,” by typing information into spreadsheets and other informal systems. Using blockchains, in contrast, would make transactions work automatically. The distributed nature of blockchains could also eliminate bottlenecks and middlemen from the transaction process. If the Private Market blockchain test works well, Nasdaq may eventually use blockchains on its much larger stock market.

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