The well-known and technologically advanced United States stock exchange known as Nasdaq announced on Wednesday that it would no longer be launching a cryptocurrency custody service as originally planned.
The launch of the proposed new business line, which was going to be governed in New York by the parameters of a special purpose trust, was supposed to take place during the second quarter of this year.
Impact of Stricter Custody Regulations on the Crypto Industry
The announcement comes as a significant setback for the cryptocurrency industry at a time when there have been recent signs of resurgence.
BlackRock, the largest asset manager in the world, made a surprising proposal for a spot bitcoin exchange-traded fund (ETF) just one month ago. This proposal reignited hope for an asset class that has been struggling with regulatory challenges and negative news for over 16 months.
BlackRock reported that there is still significant institutional interest in bitcoin and other cryptocurrencies, despite the recent coordinated efforts by U.S. authorities to clamp down on cryptocurrency (referred to as “Choke Point 2.0“).
This became apparent with the increase in the number of spot bitcoin ETF filings, as well as a victory for the white-collar side of cryptocurrency, as the SEC missed its opportunity to prevent a promising bitcoin ETF from trading, which led to a rebound in the markets.
Potential Benefits for Established Financial Companies and BitGo
In addition, the ongoing legal conflict between Ripple and the SEC resulted in a significant concession for Ripple, which masked an expensive technical loss. The ruling determined that more than 700 million dollars’ worth of Ripple’s XRP sales to hedge funds qualified as unlawful securities offerings.
In spite of this, sentiment improved as XRP short sellers were liquidated, and several cryptocurrency exchanges announced plans to restart XRP trading, reversing the delistings that they had implemented the previous year.
The decision by Nasdaq to withdraw from the cryptocurrency custody business prior to the company’s full launch is a setback, despite the fact that it may not significantly affect the positive sentiment that currently exists in the cryptocurrency industry. It suggests that the future of the industry could be uncertain if the current regulatory framework continues in its current form.
During a quarterly earnings call, Nasdaq CEO Adena Friedman disclosed that the company had abandoned its plans to launch a cryptocurrency custody service.
This decision was made as a result of the rapidly shifting business and regulatory climate in the United States. This decision echoes sentiments expressed in the cryptocurrency industry over the past year, as many companies faced similar challenges.
The custody plans were initially announced in September alongside the establishment of Nasdaq Digital Assets. They were a component of the company’s commitment to the new unit and were part of the original announcement.
In spite of the shift in custody service, Nasdaq plans to continue to develop and offer cryptocurrency software, which will include a variety of alternative custody options. They also intend to list the spot bitcoin ETF that is offered by BlackRock if this gets approved.
It is not yet known what exactly prompted Nasdaq to withdraw from the market, and it is unclear whether this was a direct cause or a reaction to a number of different factors. The company has been in talks with the New York State Department of Financial Services (NYDFS) for the better part of a year, but the approval of its proposed limited trust-purpose trust company is still up in the air.
Notably, in February, the SEC voted to enhance regulations for trading and lending firms by requiring them to keep customer assets with “qualified custodians.”
These “qualified custodians” can be chartered banks, trust companies, SEC-registered broker-dealers, or Commodity Futures Trading Commission (CFTC) derivatives merchants. This is a significant step forward in the evolution of financial regulation. The cryptocurrency industry frequently refers to this proposal as the “custody rule.”
The rule, which still needs to be approved, aims to restrict full-service cryptocurrency companies like Coinbase, which provide trading as well as custody services, and appears to target a wider range of cryptocurrencies than just cryptocurrencies themselves.
The cryptocurrency company Coinbase, which is notorious for not being registered with the SEC (except for the approval of its initial public offering by the same regulator), is against the proposed criteria to become a “qualified” custodian.
In conventional finance, the activity of betting on securities is typically separated into three distinct services: exchanges for trading, custodians for safeguarding assets, and clearinghouses for settling trades (a function that is automatically handled by the blockchain for crypto assets).
Notably, established financial players such as JPMorgan and the Small Business Association have also voiced strong opposition to the “sweeping changes” proposed by the SEC, despite the fact that they might benefit if cryptocurrency companies were forced to seek approved custodians outside of the cryptocurrency industry.
The Importance of Crypto Custody in the Industry
The fact that a reputable company like Nasdaq has chosen to withdraw from the cryptocurrency custody business raises questions about the industry’s ability to overcome obstacles posed by regulatory authorities.
In spite of the fact that the SEC has not yet implemented its more stringent custody requirements, it is becoming an increasingly likely scenario that regulations will differentiate trading from custody services. CoinDesk’s Marc Hochstein is in favor of this concept, and a number of bills currently pending in the United States Congress propose changes along these lines.
The custody of cryptocurrencies is likely to come under increased scrutiny in some form, and this could have repercussions for companies that do not offer non-custodial cryptocurrency services. If these regulations had been in place at the time, alleged incidents like Sam Bankman-Fried’s access to FTX customer accounts might not have occurred (presuming that the exchange was subject to U.S. law).
In the short to medium term, it is likely that well-established financial companies as well as crypto incumbents like BitGo, which currently dominates the market for cryptocurrency custody, will benefit from these rules. On the other hand, compared to the current state of affairs, in which a large number of crypto-native custody firms are struggling, this may be a more favorable scenario.
The fact that Nasdaq, a prominent player, ran into issues with the laws or anticipated future developments (possibly influenced by the decision regarding XRP), raises concerns about the market. Custody of cryptocurrency assets is an essential component of the industry. While some users are capable of administering their own private keys, workable solutions are required for everyone else.