The Detrimental Implications: Nasdaq’s Withdrawal from Custody Casts a Shadow over Crypto Industry

**Nasdaq Cancels Plans to Launch Cryptocurrency Custody Service Amid Positive Crypto Sentiment**
**Nasdaq’s Decision and the Crypto Industry**
Yesterday, Nasdaq, the prominent U.S. stock exchange known for its tech-forward approach, announced that it is canceling its plans to launch a cryptocurrency custody service. This decision came as a surprise blow to the crypto industry, which has been showing signs of life recently after a prolonged period of regulatory challenges and negative news. Nasdaq’s cryptocurrency custody service, which was set to launch in the second quarter of this year and would have been regulated as a special purpose trust in New York, has been called off.

**BlackRock’s Proposal and Rising Institutional Interest in Crypto**
Last month, BlackRock, the world’s largest asset manager, made an unexpected proposal for a spot bitcoin exchange-traded fund (ETF), which reignited optimism in the crypto industry. This proposal signaled that there is still deep institutional interest in bitcoin and cryptocurrencies, despite the recent regulatory crackdowns by U.S. authorities. Following BlackRock’s proposal, several other spot bitcoin ETF filings were submitted, and the white-collar side of crypto received a win when the U.S. Securities and Exchange Commission (SEC) missed the deadline to deny a different type of bitcoin ETF from starting trading. These positive developments in the industry have contributed to a market rebound.

**Ripple’s Legal Dispute and XRP Trading**
In addition to BlackRock’s proposal, a significant concession was made to Ripple in a long-standing legal dispute with the SEC. Although the concession masked Ripple’s technical defeat, it boosted sentiment in the industry. The court found that over $700 million of Ripple’s XRP sales to hedge funds constituted illicit securities offerings. As a result, XRP short sellers were liquidated, and several U.S. and international crypto exchanges announced plans to resume XRP trading, reversing the delistings that occurred in 2020.

**Nasdaq’s Retreat and the Crypto Industry’s Regulatory Challenges**
Nasdaq’s decision to back out of the crypto custody business, even before fully entering it, is a blow to the industry. This decision indicates that much of the crypto industry may face challenges if the current regulatory regime remains in place. Nasdaq CEO Adena Friedman cited the shifting business and regulatory environment in the United States as the reason for the retreat. The company had previously announced its custody plans in September, along with the formation of a new unit called Nasdaq Digital Assets, which the company remains committed to. While the exact cause of Nasdaq’s decision is unclear, it is significant that a corporation like Nasdaq is unable to navigate the regulatory landscape, raising concerns for the rest of the industry.

**The SEC’s Proposed Custody Rule and its Implications**
In February, the SEC voted to expand its regulations over trading and lending firms, requiring them to keep customer assets with qualified custodians, such as chartered banks, trust companies, SEC-registered broker-dealers, or Commodity Futures Trading Commission (CFTC) derivatives merchants. This proposal, known as the custody rule, affects more than just crypto assets and appears to target full-stack crypto companies like Coinbase that offer both trading and custody services. Coinbase, which is not registered with the SEC, opposes the proposed requirements to become a qualified custodian.

**Potential Separation of Custody Services and Trading**
The SEC’s stricter custody requirements, although not yet in effect, indicate a likelihood of regulations that separate custody services from trading. This shift in regulation could impact businesses that do not offer non-custodial crypto services. While this may benefit established financial companies and crypto incumbent BitGo, it also raises concerns about the current situation. The fact that Nasdaq, which is considered capable of navigating complex regulations, has retreated from the crypto custody business suggests that the industry needs workable solutions for everyone, even those who can hold their own keys.

In conclusion, Nasdaq’s cancellation of its cryptocurrency custody service is a significant setback for the industry. However, despite this setback, the positive sentiment in the crypto industry remains strong. It is important to address the regulatory challenges faced by the industry to ensure its continued growth and development.