By Alex Hern
The stock exchange is experimenting with ‘coloured coins’ as a way to use the public ledger to record private equity transactions
The US stock-exchange Nasdaq is experimenting with incorporating the underlying technology of the bitcoin cryptocurrency into its pre-IPO trading arm, Nasdaq Private Markets.
The wing, a subsidiary of the company that focuses on assisting investment for firms that are not yet publicly traded, will begin to write a copy of its trades into the publicly available ledger of all bitcoin transactions, known as the “blockchain”.
In doing so, it hopes to “provide extensive integrity, audit ability, governance and transfer of ownership capabilities”, according to a release from Nasdaq.
Conventionally, cryptocurrencies such as bitcoin rely on the blockchain to free them from the centralisation of traditional finance. Traditionally, one trusted authority (usually a bank) holds an accurate ledger of how much money each customer has, and electronic transactions are made possible by rewriting the ledger of the sender and recipient simultaneously.
But bitcoin, with no central body, instead shares all the information about who holds what amongst every computer running the software, to create a public ledger, the blockchain. The blockchain is so called because it records every transaction in the currency’s six-year history, grouped into a continuous chain of approximately 10-minute long transaction blocks. Every 10 minutes, when a complex mathematical problem is solved, a new block recording all the latest transactions is added and the blockchain. It means that every bitcoin transaction is public, and no single authority can prevent a transaction from taking place.
The blockchain can also hold information other than just who spent what, however, and it is this feature which Nasdaq is using. The company will be creating “coloured coins”, appending special information to the blockchain indicating that a particular fraction of a particular bitcoin can be redeemed according to the terms written into it. That coloured coin can then be passed around just like a normal bitcoin, while preserving a record of who owns the asset it is linked to.