Author: Daniel Kuhn, CoinDesk; Translation: Song Xue, LianGuai
Yesterday, the famous American technology frontiers securities exchange Nasdaq announced the cancellation of its plan to launch cryptocurrency custody services. The new business line was expected to launch in the second quarter of this year and would be regulated as a special purpose trust in New York.
At a time when there are signs of new life in the cryptocurrency industry, this news is a major blow. Last month, the world’s largest asset management company, BlackRock, unexpectedly proposed a proposal for a physically-backed bitcoin exchange traded fund (ETF), reigniting optimism for this asset class, which has been hit by regulatory agencies and bad news for at least the past 16 months.
BlackRock stated that despite the recent coordinated crackdown on cryptocurrencies by US authorities (sometimes referred to as “bottleneck 2.0”), institutions still have a strong interest in bitcoin and cryptocurrencies. A series of other applications for physically-backed bitcoin ETFs quickly followed, and after the Securities and Exchange Commission (SEC) missed the opportunity to reject another equally exciting bitcoin ETF from trading, the white-collar side of the cryptocurrency sector achieved victory and the market rebounded.
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Most importantly, last week, Ripple made a major concession in its protracted legal dispute with the SEC, overshadowing the costly technological failure of the Silicon Valley blockchain pioneer— a regional judge found that Ripple’s direct sale of more than $700 million worth of XRP to hedge funds constituted an illegal securities offering— which also boosted market sentiment. With some US and international cryptocurrency exchanges announcing plans to resume XRP trading, XRP shorts were closed out, reversing the delisting wave since 2020.
Nasdaq’s decision to exit the cryptocurrency custody business before it fully enters may not be enough to undermine the increasingly positive sentiment in the cryptocurrency market. But it is still a blow, indicating that if the current regulatory regime continues to exist, most of the industry’s business may go extinct.
During the quarterly earnings conference call, Nasdaq CEO Adena Friedman stated that the company’s exit was due to “changes in the US business and regulatory environment,” a phrase that the cryptocurrency industry has often heard in the past year. The company initially announced its custody plan in September and also established a new department, Nasdaq Digital Assets, which is still committed to this. Friedman added that the company still plans to “build and deliver” cryptocurrency software, including other custody solutions, and list BlackRock’s physically-backed bitcoin ETF if approved.
The exact reason for Nasdaq’s withdrawal is still unclear – whether there is a direct reason, or this is just an example of a company predicting the future. It is reported that the company has been in dialogue with the New York State Department of Financial Services (NYDFS) for several months, and it is currently unclear whether its proposed limited purpose trust company has obtained official approval.
It is worth noting that in February, the U.S. Securities and Exchange Commission (SEC) voted to expand its existing regulatory scope to all trading and lending companies, requiring them to entrust client assets to “qualified custodians”, such as chartered banks or trust companies, broker-dealers registered with the SEC, or commodity futures trading commission (CFTC) derivatives merchants. Crypto referred to this proposal as the “custody rule”.
This rule requires approval to take effect and the asset classes involved are not just cryptocurrencies, but it seems to aim at restricting full-stack cryptocurrency companies like Coinbase that provide both trading and custody services. It is well known that Coinbase is not registered with the SEC (except for its IPO approval by the same regulatory agency) and it does not agree with the proposed requirement to become a “qualified” custodian.
In traditional finance, legalized securities speculation is usually divided into three different services – exchanges that handle transactions, custodians that hold exchanged assets, and clearinghouses that ensure transaction settlement (part of the business automatically handled by the blockchain in the case of cryptographic assets). It is worth mentioning that some financial institutions such as JPMorgan Chase and the Small Business Association strongly oppose the SEC’s “comprehensive reform”, although they may benefit if cryptocurrency companies have to leave the cryptocurrency industry to find approved custodians.
You might think that companies like Nasdaq are suited to deal with the complicated procedures, which is why its decision to withdraw from cryptocurrency custody is so persuasive. If they can’t do it, who can? Although the stricter custody requirements of the SEC have not yet taken effect, it seems increasingly likely that regulation will separate custody services from trading.
In some form, cryptocurrency custody will face stricter scrutiny – a situation that may affect any company that does not offer non-custodial cryptocurrency services. If these changes take effect, Sam Bankman-Fried will not be able to be accused of intruding into FTX client accounts (assuming overseas exchanges are subject to U.S. law). At least in the medium term, such rules may be most beneficial to mature financial companies and cryptocurrency giant BitGo (leading cryptocurrency custody). But considering how many local custody companies are constantly giving up, even so, it may be better than the current situation.
But the fact that Nasdaq cannot fully violate the law or understand the actual situation (or even be scared by XRP’s decision) is not a good sign. Cryptocurrency custody is the cornerstone of this industry. Even if you can control your own keys, you must provide feasible solutions for others.