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(Kitco News) - The institutional adoption narrative for digital assets hit a snag on Tuesday as Nasdaq (NDAQ) announced that it is halting its plans to launch a crypto custody service due to the uncertain regulatory conditions in the United States.
The stock exchange operator had originally planned to launch its custody service by the end of the second quarter, but Nasdaq CEO Adena Friedman said those plans have been put on hold for the time being while speaking during the company’s Q2 results call.
“This quarter, considering the shifting business and regulatory environment in the United States, we have made the decision to halt our launch of the U.S. digital assets custodian business and our related efforts to pursue relevant licenses,” Friedman said.
She said the firm remains committed to developing its digital asset business, they just want to ensure that they have the necessary licenses and approval from regulators to avoid any fines or enforcement actions.
“We continue to build and deliver technology capabilities that position Nasdaq as a leading digital assets software solutions provider to the broader global industry,” Friedman said. “This includes advancing our custody solution as a technology platform to serve the broader, global digital assets marketplace.”
She added that Nasdaq will continue to closely monitor the market for potential regulatory developments in the coming months.
Nasdaq first announced the plans for its crypto custody project in September with the initial goal of offering customers custody services for Bitcoin (BTC) and Ether (ETH).
The collapse of FTX in November and the attention it attracted from regulators resulted in an unfriendly environment for crypto firms and digital assets in the U.S. as the Securities and Exchange Commission brought the hammer down on the industry.
The SEC has since filed lawsuits against the largest cryptocurrency exchanges in the world – including Binance, Coinbase, and Kraken – with a variety of charges such as the unregistered sale of securities and a failure to register the offer and sale of crypto asset staking programs.
Nasdaq took these lawsuits as a sign to pause the rollout of custody services to ensure that the eventual release is done in full regulatory compliance.
“It’s a tall order to be a US custodian and trust company,” said Terrence Yang, Managing Director at Swan Bitcoin. “In light of FTX bankruptcy and Prime Trust being in receivership, etc., there’s almost certainly heightened scrutiny among regulators. I bet they’re not seeing a good risk/return trade-off in pursuing now.”
“I can see Bitcoin creating more separation from other crypto and Nasdaq coming back but focusing only on Bitcoin custody as some of the best tradfi institutions like Blackrock, Fidelity, Invesco, focus on spot Bitcoin ETFs and not other crypto,” he added.
Yang said Nasdaq “might re-initiate” the launch of custody services “within 18 months to two years.” He noted that this could happen sooner if the current bull market continues, or later if a bear market ensues.
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Another reason for the cautious approach by Nasdaq is the fact that the SEC is currently reviewing two spot Bitcoin exchange-traded funds (ETFs) that are looking to be listed on the Nasdaq exchange, and the firm wants to ensure that it doesn’t do anything that will aggravate the regulator and harm the chances of those applications being approved.
According to James Allen, a certified public accountant and founder of Billpin.com, “Nasdaq's decision to halt its crypto custody plans is a prudent move in the face of the current regulatory climate.”
“The world of cryptocurrencies is still very much the Wild West, with regulatory bodies around the globe grappling with how to manage and oversee this burgeoning sector,” Allen said. “Nasdaq, being a stalwart of financial markets, is likely taking a step back to ensure they are not stepping into uncharted territory without a clear map.”
He added the motivation behind the move is likely due to “a combination of risk management and a desire to maintain their reputation as a trusted player in the financial markets. In the world of finance, trust is the currency that matters most. By halting their crypto custody plans, Nasdaq is essentially saying that they won't risk their reputation on a sector that is still finding its footing.”
“It's like a seasoned chef refusing to serve a dish that hasn't been perfected - it's not about the potential popularity of the dish, but about maintaining the high standards they've set for themselves,” he said.
As for when Nasdaq could reinitiate the launch of crypto custody services, Allen likened it to trying to predict the weather. “It will largely depend on how quickly regulatory bodies can establish clear and fair rules for the operation of crypto custody services,” he said. “Just as a sailor wouldn't set sail in the midst of a storm, Nasdaq won't likely move forward until the regulatory clouds have cleared.”
Kitco Crypto reached out to Nasdaq for a comment on this development, but did not receive a response at the time of publication.
