Nasdaq’s withdrawal from custody is bad news for crypto.

Nasdaq's withdrawal from custody is bad news for crypto.

The Nasdaq’s Exit from Crypto Custody: A Blow to the Industry

The recent announcement by Nasdaq, the prominent tech-forward U.S. stock exchange, that it is canceling plans to launch a cryptocurrency custody service is a significant blow to the crypto industry. This news comes at a time when there are emerging signs of life in the industry, with institutional interest in bitcoin and crypto on the rise. The decision by Nasdaq to exit the crypto custody business before fully entering raises concerns about the future of the industry under the current regulatory regime.

Nasdaq’s decision to withdraw from the crypto custody business is attributed to the shifting business and regulatory environment in the United States. This is a familiar refrain in the crypto industry, as it has faced numerous challenges due to regulatory uncertainty. The company initially announced its custody plans in September, along with the formation of a new unit called Nasdaq Digital Assets. While Nasdaq remains committed to this unit and still plans to develop and deliver crypto software, including other custody solutions, the cancellation of the cryptocurrency custody service is disappointing news.

It is unclear why exactly Nasdaq decided to back out of the crypto custody business. The company was reportedly in dialogue with the New York State Department of Financial Services (NYDFS), but it is unknown if its proposed limited trust-purpose trust company received official approval. However, it is worth noting that the Securities and Exchange Commission (SEC) voted in February to expand its regulations over all trading and lending firms, requiring them to keep customer assets with qualified custodians. This proposed custody rule aims to curtail full-stack crypto companies like Coinbase, which offer both trading and custody services. Coinbase, along with other financial incumbents, has voiced its disapproval of these requirements.

In traditional finance, custody services are separate from trading, with exchanges handling trading, custodians safekeeping assets, and clearinghouses ensuring trades settle. This clear delineation of roles helps maintain the integrity of the financial system. However, in the crypto industry, the line between trading and custody services is often blurred. The SEC’s proposed custody rule seeks to address this by separating custody services from trading. This shift towards stricter custody requirements is likely to impact businesses that do not offer non-custodial crypto services.

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The fact that Nasdaq, a reputable and experienced player in the financial industry, is unable to navigate the regulatory landscape and withdraws from the crypto custody market raises concerns about the future of the industry. It underscores the need for workable solutions in crypto custody, as it is a cornerstone of the industry. Holding one’s own keys may be an option for some, but there must be viable solutions for others.

The Nasdaq’s exit from the crypto custody business is not enough to derail the positive sentiment in the crypto industry. Recent developments, such as BlackRock’s interest in bitcoin and a major concession to Ripple in a legal dispute with the SEC, have buoyed sentiment. However, it serves as a reminder that the industry’s growth potential heavily depends on regulatory clarity and favorable business conditions.

To summarize, Nasdaq’s decision to cancel its cryptocurrency custody service is a blow to the industry. It highlights the challenges faced by crypto companies in navigating the shifting regulatory landscape. The SEC’s proposed custody rule and the need for separation between custody and trading services raise important questions about the future of the industry. While the sentiment in the crypto industry remains positive, the Nasdaq’s exit serves as a warning sign that regulatory clarity and viable custody solutions are crucial for sustained growth.