CRYPTO REGULATION
Nasdaq Backing Out Of Crypto Custody
How bad is it for crypto?
Crypto market is highly volatile. This hallmark of the industry is not an insight, but a common fact. But its inconstancy do not apply solely to cryptocurrency, but also to the realm’s state.
Amidst the Ripple’s partial victory in the litigation against the U.S. Securities and Exchange Commission, which is believed to be a silver lining in crypto adoption, the industry was stressed by a literal boom. Reportedly, Nasdaq ceased its plans for maintaining crypto custody due to unfavourable regulative climate in the U.S. The abrupt cancellation created a massive disturbance among the investment community. But why does this event have such a rampant impact on crypto?
Context:
Let’s take a look at full chronology preceding our day and age.
In September, 2022, the iconic Nasdaq stock exchange revealed its ongoing work on crypto custody service. The infrastructure and legal framework was being elaborated amid the confirmed application to the New York Department of Financial Services (NYDFS) for a limited-purpose trust company.
However, lately Nasdaq backed out of coining the crypto custody, which is perceived as a severe backlash from harsh U.S. cryptocurrency regulative measures. The cancellation of these plans is far from Nasdaq’s deliberate initiative. By contrast, the stock exchange is among the go-getters for crypto institutional adoption. Remarkably, Nasdaq is partnering with potential ETF issuers, inter alia investment giant BlackRock, which has been recently known for filing spot Bitcoin ETF.
Possible Reasons For Ceasing The Initiative
The promising role of Nasdaq in the crypto industry is far from tangible, but the stock exchange carries on contributing to the uplifting of the sphere. Alas, not all plans are met with the relevant crypto legitimate framework, which halts crypto custody integration in institutional dimension.
Specifically, the SEC’s accounting directive, known as Staff Accounting Bulletin №121, has turned out to be a strong hurdle for trading firms to distribute digital assets. The document envisages the recommendation for cryptocurrencies custodians to record ones as liabilities on the companies’-owned balance.
Simply put, a banking institution which offers cryptocurrency custody, would need to consider these coins as the assets of the banks, but not of the clients. This means that the capital charge against the asset is to be taken.
Given the obstacles this document arises, the companies are obviously reluctant to maintain crypto custody. As soon as the legitimate conditions are less restraining, the chances for successful implementation of crypto custody services can rise.
Still, the genuine reason for Nasdaq eliminating upcoming crypto custody remains rather obscure regardless of my assumptions. Nevertheless, as CoinDesk reported, the firm was in dialogue with the New York State Department of Financial Services (NYDFS) for quite a while, and “it’s unknown if its proposed limited trust-purpose trust company got the official greenlight”.
Traditional Banks’ Fusion with Crypto: Current State-of-Things
Apparently, at first glance large banking institutions and exchanges are not fond of integrating digital assets into their workflow, and this sounds rather irrational: if the crypto is a toolkit for the banking sector, why is its adoption sought painfully slow?
This question is answered by Volodymyr Nosov — CEO of one of the largest european crypto exchanges WhiteBIT. In his interview to Forbes Ukraine, he stated:
“(…) the cryptocurrency and crypto market are not the competitors to the banking sector. They are the tools for banks’ expansion, new products, reaching new audiences and markets.”
Hence, the competitive nature between banks and crypto still has its place to be. The consequences of such a tendency are observable by a recent chain of events, and the Nasdaq case spurs scrutiny towards its impact. Still, BlackRock, Nasdaq, and other large institutional bodies indicate the opposite, specifically: the readiness to give crypto projects a go and facilitation with coining the proper regulatory basis. Volodymyr Nosov also notices this trend:
“However, a great number of large-scale banks, such as JP Morgan, have had teams in-house for several years and are constantly recruiting people to develop blockchain. Major financial institutions have already realised that this is necessary and are taking specific steps. And they are waiting for clear regulations”
Indeed, the major players in the financial realm show their keen interest in integrating blockchain-based technologies, as well as cryptocurrency and DeFi. But the cruciality lies in the regulation obscurity — the lack of proper law basis halts the processes of crypto industry entering the banking sector on full scale.
Outlooks
Apart from a recommendation SAB №121, which I mentioned above, the crypto custody remains a rather uncertain element in the U.S. legal framework. The bad thing is: it is keeping updated.
Accordingly, in February 2023, the SEC arranged the expansion of its existing regulations over trading and lending firms. To be more specific, the new regulations require companies to keep customer assets with qualified custodians — trust companies, SEC-registered broker-dealer firms, chartered banks, and Commodity Futures Trading Commission (CFTC) derivatives merchants. Despite the seeming soundness of this legislation, the lack of regulation towards crypto entities confronts with the obligation, but theoretically may open the door to such entities as Nasdaq with a more distinct approach.
