SEC proposes conditional crypto custody routes for advisers and funds

The U.S. Securities and Exchange Commission proposed new custody rules on Oct. 1 that would let registered investment advisers and regulated funds use state trust companies or, under conditions, hold some crypto assets themselves. The SEC’s announcement says the proposal would amend rules under the Investment Advisers Act of 1940 and Investment Company Act of 1940. The rules are proposed; they have not taken effect.

Which crypto assets would the proposal cover?

The proposal applies to crypto assets that are funds or securities under the Advisers Act, and to crypto securities or similar investments held by regulated funds, according to the SEC’s proposed rule. It does not treat every crypto asset as a security. Its custody requirements address how advisers safeguard client assets and how regulated investment companies and business development companies hold covered assets.

That scope matters because crypto custody depends on control of private keys and transaction authorization, while the existing custody framework uses categories such as “qualified custodian.” The SEC’s proposal adds conditional pathways for covered assets rather than changing their legal classification.

When could an adviser hold client crypto itself?

An adviser could use self-custody only after determining in writing that no qualified custodian is available for the particular crypto asset. It would have to revisit that determination at least quarterly and document its expertise in safeguarding the asset. Its controls would need to address private-key management, require at least two people to authorize transactions, and keep each client’s assets in blockchain addresses holding only that client’s assets.

The proposal would also require cybersecurity controls, annual written reviews of safeguarding systems, and an internal control report from an independent public accountant within six months of beginning self-custody and annually afterward. Clients would receive account statements at least quarterly. For a regulated fund using its adviser to hold assets, the fund’s board would oversee the arrangement and make an annual reasonable-care determination.

How would state trust companies qualify?

Advisers and regulated funds could use a state trust company if they determine in writing, after due inquiry, that it is authorized by the relevant state banking authority to provide crypto custody. They would also need a reasonable basis for believing the company maintains and implements written safeguards against theft, loss, misuse and misappropriation. Those policies must address private-key management and cybersecurity, with the determination repeated annually.

The SEC said public comments will remain open for 60 days after the proposing release appears in the Federal Register. Until the commission adopts a final rule, the proposed routes do not change current custody obligations.