A report was recently released by Nasdaq on the state of the world's financial system, detailing financial fraud and various other activities. Nasdaq (NDAQ) CEO and President Adena Friedman joins Yahoo Finance's Julie Hyman and Brian Sozzi from the World Economic Forum in Davos, Switzerland to discuss the report, spot Bitcoin ETFs, outlook for Nasdaq, AI, and more.
"If you look at the problem that we're dealing with, we're dealing with money laundering and financial fraud. And it is a $3 trillion problem in terms of money that's laundering through the system and about a $500 billion issue with fraud. Those are just staggering statistics," Friedman said. "And then what we did was we broke it down into different types of money laundering activities, whether that's human trafficking or terrorist activity. And then in fraud you look at things like romance scams versus elderly abuse. And so you see these different human tragedies kind of playing out in the data. And that's one of the things that we try to do is bring the data and the analytics as to how big this problem was."
"I don't think spot ETFs for crypto, for bitcoin necessarily is going to create any sort of new challenges. I think what that's saying is really more that the evolution of the crypto market, and particularly the Bitcoin market, is such that the underlying price formation is to the level that the SEC is willing to allow retail investors to invest in a security that's a layer on top of Bitcoin, right? They don't actually have to invest in Bitcoin itself," Friedman explained. "They can invest in a security that's in a regulated market that allows them to express their views on the future of Bitcoin prices, but they don't actually have to buy the Bitcoin themselves. There's still a lot of friction, I think, in the system around actual buying and selling of Bitcoin, but I also would say that it does make that asset class more accessible to retail. So the need for investor protection is as strong as it always has been."
"We really have transformed to be a global technology company that serves the financial system. And of course, our markets are our foundation and they're extremely technologically driven, right? They're very advanced technology in itself. In fact, we have our first SEC approved AI order type that we're launching this quarter," Friedman said. "So what does that mean? It means that it's an order type that factors in like about 150 different factors every second to determine the ... speed at which certain orders should be executed to maximize the fill rate. It's a very esoteric rule, I mean an order type, but it shows that innovation is very, very alive inside the markets."
AI (00:07:00)
"I think that, well, we hope they (AI companies) come to market via Nasdaq. I do think that AI driven companies, AI enabled companies and AI companies themselves, those companies that can really help transform business. I think that those are the types of companies you'll see more and more of coming out to the public markets," Friedman said. "Very exciting time, I have to say, because every company can benefit from this next generation of technology. I think you can look at every industry and gen AI has applicability. So companies that help unlock that potential are going to be, I think, companies that a lot of investors are looking at."
It's all part of Yahoo Finance's exclusive coverage from the World Economic Forum in Davos, Switzerland, where our team will speak to top decision-makers as well as preeminent leaders in business, finance, and politics about the world’s most pressing issues and priorities for the coming year.
Editor's note: This article was written by Zach Faulds.
BRIAN SOZZI: Really a fascinating new piece of research out of the NASDAQ on the state of the world's financial system, notably, what is happening with financial fraud and various other activities. Let's get right to NASDAQ President and CEO, Adena Friedman. Adena, nice to see you in Davos. We normally see you in New York. Good to see you here.
ADENA FRIEDMAN: Yeah. It's great to be here.
BRIAN SOZZI: Look, I was going through this report and I was shocked by some of the findings that your team put together here. What is the prevalence of financial fraud right now globally?
ADENA FRIEDMAN: Yeah. Well, if you look at the problem that we're dealing with, we're dealing with money laundering and financial fraud. And it is a $3 trillion problem in terms of money that's laundered through the system, and about a $500 billion issue with fraud. Those are just staggering statistics.
And then what we did was we broke it down into different types of money laundering activities, whether that's human trafficking or terrorism activity. And then in fraud, you look at things like romance scams versus elderly abuse. And so you see these different human tragedies kind of playing out in the data. And that's one of the things that we try to do is bring the data and the analytics as to how big this problem was.
What are the banks doing to try to fix it? How are they managing to work on this problem together and with the public sector? But also what is the human toll that these crimes take? So we do have some stories of people who were victims of these crimes. And so to understand the impact it had on their lives as well.
JULIE HYMAN: So when the problem is that big, how do you get your arms around it?
ADENA FRIEDMAN: That, I think is the biggest issue, right? It's such an enormous problem, and it's a completely global problem. And when you think about criminals, they don't just bank in one bank. They bank across the entire system. So a single bank, a single institution cannot solve this problem. And law enforcement alone can't solve it either. So it has to be a public-private partnership.
It has to be that the banks work together, they share they share information so that they can actually tackle the problem together and that they also work very closely with law enforcement. Some of those things are happening today, but a lot could be strengthened to make the problem not necessarily-- it's going to be hard to make it go away, but to contain the problem a lot better than we can today requires really collective action.
BRIAN SOZZI: Is technology a main driver of it?
ADENA FRIEDMAN: Yeah. I think technology is the great unlock when you think about it. So one of the things we really focus on is, what is the pattern of behavior that criminals tend to act on. So what do they actually do in the financial system? How do they use different account openings, closings, passing money through. How do they behave? So if you can really start to look-- we call it that kind of the typologies of criminal behavior.
And then you use automation automation, AI in order to be able to root out that behavior across the system. The first thing you have to do is bring all the data together. So all the data across millions and millions of transactions. NASDAQ today with our VeraFin platform, we see $6 trillion of assets. That's how large the banks-- we have 2,500 banks. They represent about $6 trillion. And so we see all their transaction data.
You then apply those AI algorithms against these very specific typologies of behavior. It allows you to solve the problem much more effectively. But the United States allows for data sharing, but other countries don't. And so that is where I really feel like the regulators are really tying the banks hands behind their back in trying to solve this problem because they can't actually share data with each other to help find the criminals.
JULIE HYMAN: What role does crypto play in the financial fraud that you're seeing?
ADENA FRIEDMAN: I would say it this way, payments or payments. And I think the faster the payment, the faster the systems have to be in order to be able to protect the system. And also the fact that cryptocurrencies are-- like once you make a transaction a cryptocurrency, it's immutable, so meaning it's done. You can't retract it.
Banks with wire fraud or with ACH fraud, they can manage with them themselves to almost back out of if they think that a bad wire has gone through, they can try to retract the wire. That is not the case with crypto. But generally speaking, payments are payments. So we have to look at regulation. We have to look at solving this problem of financial crime in the same way, same technology, same capabilities, but at a faster speed and with more precision because of the fact that it's an immutable outcome.
BRIAN SOZZI: Does the speed around this fraud just pick up now in light of what we saw with Bitcoin spot ETFs? Does it become more just ever present in our system?
ADENA FRIEDMAN: I don't think spot ETFs for Bitcoin necessarily is going to create any sort of new challenges. I think what that's saying is really more that the evolution of the crypto market and particularly the Bitcoin market is such that the underlying price formation is to the level that the SEC is willing to allow retail investors to invest in a security that's a layer on top of Bitcoin, right?
They don't actually have to invest in Bitcoin itself. They can invest in a security that's in a regulated market that allows them to express their views on the future of Bitcoin prices. But they don't actually have to buy the Bitcoin themselves. There's still a lot of friction I think in the system around the actual buying and selling of Bitcoin. But I also would say that it does make that asset class more accessible to retail.
So the need for investor protection is as strong as it always has been. And I think here in terms of anti-fin crime, this is more the broader banking system using cryptocurrencies for payment, using government fiat for payment. The criminals use whatever's available to them. So the banks need to be able to leverage the same amount of technology to be able to protect the system as well.
JULIE HYMAN: Now, Adena, if an investor hadn't been paying attention in the past few years, they might tune in and say, why is the CEO of the NASDAQ talking about financial fraud? Well, it's because you've changed the company in a lot of ways, including with a huge acquisition last year, Adenza for $10.5 billion, which it closed on November 1, if I'm not mistaken. What is NASDAQ now? How should investors be thinking about the company?
ADENA FRIEDMAN: Yeah. We really have transformed to be a global technology company that serves the financial system. And of course, our markets are our foundation. And they're extremely technologically-driven. They're a very advanced technology in itself. In fact, we have our first SEC-approved AI order type that we're launching this quarter.
JULIE HYMAN: What does that mean?
ADENA FRIEDMAN: It means that it's an order type that factors in about 150 different factors every second to determine the price at which-- or the timer, sorry-- the speed at which certain orders should be executed to maximize the fill rate. It's a very esoteric rule. I mean an order type. But it shows that innovation is very, very alive inside the markets.
But at the same time, we've been able to develop really strong relationships across corporates, investors, banks and brokers, and other exchanges. So we now have become a technology provider to all of our clients, helping them navigate the markets with transparency tools, helping them be markets with our capital markets technology, and helping them manage risk in their regulatory obligations with the Adenza suite, which is Calypso and Axiom as well as with our anti-financial crime capabilities.
BRIAN SOZZI: Is this the year where we get a lot of AI companies that are private now come to market and come to market via the NASDAQ?
ADENA FRIEDMAN: I think that-- well, we hope they come to market via NASDAQ. I do think that AI-driven companies, AI-enabled companies, and AI companies themselves, those companies that can really help transform business, I think that those are the types of companies you'll see more and more of coming out into the public markets.
Very exciting time, I have to say, because every company can benefit from this next generation of technology. I think you can look at every industry and gen AI has applicability. So companies that help unlock that potential are going to be, I think, companies that a lot of investors are looking for.
JULIE HYMAN: Yeah. It definitely. Seems like there's demand I wanted to turn to a couple of ESG topics, because this is something the NASDAQ has been out front on. You have a board reporting requirements or at least explain reporting requirements where boards by the end of the year have to have at least one diverse candidate, a woman or someone who identifies as female or explain why they don't. You defeated a court challenge to that rule. There's been a backlash against some of this type of accountability, if you will. What do you think? Why did you guys decide to fight it through here?
ADENA FRIEDMAN: Yeah. I think we have to look at the Genesis of the rule. The Genesis really was that it was really an investor-driven request from investors. They had been for years talking to us about disclosures around board composition as being one of the factors that they use in helping them understand the company.
And for certain investors, they have certain-- whether certain investment themes or just an understanding of the composition of the board is helpful. We as NASDAQ, we are one of several gatekeepers to the public markets. So we look at governance as part of our listing review.
But the fact of the matter is what we're really trying to do is provide investors with a very simple tool that enables them very quickly and easily to understand the composition of a board. And then to the extent that companies are looking to diversify their boards, they have at least one female-- person who self represents themselves as female, one person who self represents themselves as a minority, or the board can explain the company can explain why they don't.
And they could have lots of reasons for that. They could have chosen that they wanted other areas of expertise or other things to fill in the needs of their board. But this gives investors the opportunity to understand the company better and do it in a way that's comparable across companies. And I think that that's really what it was meant to do.
JULIE HYMAN: Yeah.
BRIAN SOZZI: Is it a diverse board, diverse thinking the way to go? Doesn't that make for a better company? And are you surprised that these discussions or this backlash against DEI is even happening?
ADENA FRIEDMAN: Well, I think diversity comes in all forms. So our view is that boards should represent a diversity of expertise, a diversity of background. You should look at your own clients and say, does our board represent the people we serve? Then at the same time, it should also-- different experiences. And I'm always looking for really exciting people to serve on our board and people with the right experience, the right background.
And someone who also is representative of the people that we serve as clients and the people we serve internally as employees. And I can tell you, it makes for a better board discussions. It makes it so that I do feel like NASDAQ because of all of the efforts we've had around really general inclusion across the company and including our board has made us a better company.
BRIAN SOZZI: Fascinating discussion. Good to see you here on the ground at the World Economic Forum. NASDAQ CEO Adena Friedman, we'll see you back in New York City.
ADENA FRIEDMAN: Great. Thank you, guys. Thanks very much.