Nasdaq announced yesterday that it was cancelling plans for a cryptocurrency custodial service. The new business, which was to be regulated in New York as a special-purpose trust, was scheduled to launch in second quarter this year.

The news comes amid signs that the crypto industry is on the rise. BlackRock’s unexpected proposal for a bitcoin spot exchange-traded funds (ETF) last month rekindled hope for an asset class that has been hammered by regulators for the past 16 months.

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BlackRock signaled that, despite the recent, apparently-coordinated crypto clampdown by U.S. authorities (sometimes called “Choke Point 2.0”), there is still deep institutional interest in bitcoin and crypto. The white-collar crypto side scored a victory after the U.S. Securities and Exchange Commission missed its window for denying a similar but equally exciting type bitcoin ETF from starting trading. The markets reacted.

A major concession made to Ripple in a long simmering dispute last week masked its expensive technical defeat – after a district court found that Ripple’s direct sales of XRP to hedge funds constituted illegal securities offerings – also boosted sentiment. XRP short-sellers were liquidated after a number U.S. crypto exchanges and international ones announced their plans to resume XRP trading. This reversed a wave delistings that began in 2020.

The decision by Nasdaq to leave the crypto custody market before entering it fully is unlikely to be enough to undermine the positive sentiment towards crypto. It is a blow to the crypto industry, but it does not mean that the entire industry will be doomed if the current regulations are maintained.

Adena Friedman, Nasdaq’s CEO, said in a quarterly earnings conference that the company pulled out due to “the changing business and regulatory environments in the United States.” This is a phrase that has heard a lot over the last year. In September, the company announced its plans for custody alongside the creation of a new division Nasdaq Digital Assets. The firm is still committed to this unit. Friedman said the firm will continue to “build” and deliver crypto software including other custody solutions and list BlackRock’s spot bitcoin ETF , if it is approved.

There’s no clear reason why Nasdaq has backed out. It’s unclear if there is a direct cause, or if the corporation is simply reading tea leaves. CoinDesk has contacted the company for further comment. The company was in contact with the New York State Department of Financial Services for several months. It is not known if the proposed limited-purpose trust received the official go ahead.

Crypto refers to the proposal as a href=”https://www.coindesk.com/consensus-magazine/2023/03/08/the-secs-custody-rule-would-be-a-net-positive-for-crypto/”>the “custody rule.” Crypto refers to the proposal as the “custody rules.”

The rule is not yet in place and needs to be approved before it can go into effect. It affects more than just cryptocurrency, but appears to be designed to curb full stack crypto companies that offer both custody and trading services. Coinbase, despite its IPO approval by the SEC, is not registered with them. also disapproves the proposed requirements for becoming “qualified” to be a custodian.

Opinion

Legalized gambling on securities in traditional finance is usually split into three distinct service . There are exchanges which handle trading, custodians who safekeep assets being traded and clearinghouses (which ensure trades settle) – a part of the business handled automatically by blockchains for crypto assets. The Small Business Association and JPMorgan, two financial institutions that are well-established in the industry, have also been vocal against the SEC’s sweeping changes despite the fact that they could benefit from the move.

It would seem that a company like Nasdaq could easily navigate the red-tape, so its decision to withdraw from crypto custody is telling. Who can do it if they can’t? It seems likely that the SEC will soon introduce stricter regulations that separate custody from trading. CoinDesk’s own Marc Hochstein supports the idea, and a number of bipartisan <a href="https://www.coindesk.com/policy/2023/07/19/new-us-senate-bill-wants-to-regulate-defi-like-banks/#:~:text=The%20bipartisan%20bill%2C%20the%20Crypto,the%20bill%20reviewed%20by%20CoinDesk. Bills being considered by the U.S. Congress are similar.

Crypto custody will be scrutinized in some way or another. This is likely to impact businesses that do not provide non custodial services. It’s good. If such changes had been implemented, they would have prevented Sam Bankman Fried from allegedly dipping his hands into FTX customers’ accounts (assuming that the overseas exchange is subject to U.S. laws). These rules will likely benefit BitGo, the crypto custody leader , and established financial firms in the short to medium term. Even that would be better than the current situation considering how many crypto native custody firms are dropping the bag.

The fact that Nasdaq is unable to understand the laws, or even what lies ahead (or was spooked because of the XRP ruling) does not augur well. Crypto custody is an important part of the industry. There must be solutions available for all users, even if you are able to keep your own keys.