Yesterday, Nasdaq, the prominent, tech-forward U.S. stock exchange, announced it is calling off plans to launch a cryptocurrency custody service. The new business line, which would have been regulated as a special purpose trust in New York, was slated to launch in the second quarter of this year.

The news is a significant blow amid emerging signs of life in the crypto industry. Last month, an unexpected proposal from world’s largest asset manager, BlackRock, for a spot bitcoin exchange-traded fund (ETF) rekindled optimism for an asset class that was pummeled by regulators and bad news for at least the past 16 months.

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BlackRock signaled that, despite the recent, apparently-coordinated crypto clampdown by U.S. authorities (sometimes called “Choke Point 2.0”), there is still deep institutional interest in bitcoin and crypto. A flurry of other spot bitcoin ETF filings quickly followed, and the white-collar side of crypto scored a win after the U.S. Securities and Exchange Commission (SEC) missed its window to deny a different but similarly exciting type of bitcoin ETF to start trading. Markets sprang back.

On top of all that, a major concession to Ripple last week in a long simmering legal dispute with the SEC masked the Silicon Valley blockchain pioneer’s expensive technical defeat – after a district judge found that over $700 million of Ripple’s sales of XRP direct to hedge funds constituted illicit securities offerings – also buoyed sentiment. XRP short sellers were liquidated as a number of U.S. and international crypto exchanges announced plans to restart XRP trading, reversing a wave of delistings from 2020.

Nasdaq’s decision to exit the crypto custody business before it fully entered is likely not enough to derail the increasingly positive sentiment in crypto. But it is nonetheless a blow, and one that portends that much of the industry might be on its way to nowhere if the current regulatory regime stays in place.

In a quarterly earnings call, Nasdaq CEO Adena Friedman said the firm pulled out because of “the shifting business and regulatory environment in the United States,” a line that crypto has heard often over the past year. The company initially announced its custody plans in September alongside the formation of a new unit Nasdaq Digital Assets, to which the firm remains committed. Friedman added the firm still plans to “build and deliver” crypto software, including other custody solutions, and list BlackRock’s spot bitcoin ETF if that is approved.

It’s still unclear why exactly Nasdaq is backing out – whether there’s proximate cause or if this is just an example of a corporation reading the tea leaves. (CoinDesk has reached out for more comment.) The firm was reportedly in dialogue with the New York State Department of Financial Services (NYDFS) for months, and it’s unknown if its proposed limited trust-purpose trust company got the official greenlight.

Notably, in February, the SEC voted to expand its existing regulations over all trading and lending firms by requiring them to keep customer assets with “qualified custodians,” meaning chartered bank or trust companies, SEC-registered broker-dealers or Commodity Futures Trading Commission (CFTC) derivatives merchants. Crypto speaks about the proposal as the “custody rule.”

The rule, which needs approval to go in effect, implicates more asset classes than just crypto, but seems designed to curtail full-stack crypto companies like Coinbase that offer both trading and custody services. Coinbase is famously (or infamously) not registered with the SEC (aside from having its IPO approved by the same regulator), and it disapproves of the proposed requirements to become “qualified” as a custodian.

See also: Matt Kolesky – Where the SEC’s Proposed Custody Rule Comes Up Short for Crypto | Opinion

In traditional finance, legalized gambling on securities is typically split into three distinct services – there are exchanges that handle trading, custodians that safekeep the assets being exchanged and clearinghouses that make sure trades settle (a side of the business that is handled automatically by the blockchain in the case of crypto assets). It’s worth mentioning a number of financial incumbents like JPMorgan and the Small Business Association also came out hard against the SEC’s “sweeping changes,” even though they might stand to benefit if crypto companies had to go outside the crypto industry to find approved custodians.

You might think a firm like Nasdaq would be fit to navigate the red tape, which is why its decision to back out of crypto custody is so telling. If they cannot do it, who can? Although the SEC’s stricter custody requirements are not yet in play, it seems increasingly likely that there will be regulation that separates custody services from trading. CoinDesk’s own Marc Hochstein supports the idea, and a number of bipartisan bills going through the U.S. Congress suggest the same.

In some form or another, crypto custody is going to come under greater scrutiny – a situation that would likely impact any business that does not offer non-custodial crypto services. And good. Such changes would have prevented Sam Bankman-Fried from allegedly dipping into FTX customer accounts had they been in effect (assuming for the hypothetical the overseas exchange was subject to U.S. law). Such rules would likely, at least in the near to mid term, benefit established financial companies and crypto incumbent BitGo (which dominates crypto custody) most. But even that might be preferable to the current situation, considering how many crypto-native custody firms keep dropping the bag.

But the fact that Nasdaq can’t quite hack the laws or grok what’s down the pike (or was even spooked by the XRP decision) does not bode well. Crypto custody is a cornerstone of the industry. Even if you can hold your own keys, there has to be workable solutions for everyone else.