SEC proposes crypto custody routes for advisers and funds

The SEC proposed new crypto custody rules on Oct. 1, opening conditional self-custody and state trust company options for registered investment advisers and regulated funds. The move would widen the routes available under rules the agency says have limited advisers’ ability to invest in some crypto assets; it remains a proposal, not a new rule in force. In its announcement of the proposal, the SEC said the changes are intended to modernize custody requirements and expand investor choice. Reuters also reported the proposal on Oct. 1.

The change is narrower than a general crypto custody regime: the SEC’s release covers registered investment advisers and regulated funds, meaning registered investment companies and business development companies, and applies only to specified crypto assets under federal securities laws. The proposal would amend rules under the Investment Advisers Act and Investment Company Act, including reporting and recordkeeping requirements. It also addresses financial statement audits for advisers and broker-dealer custodial services for regulated funds.

When could an adviser hold client crypto itself?

Under the proposal, self-custody would be a fallback when a permitted custodian is unavailable, not an unrestricted alternative. The SEC’s proposed rule would require an adviser to make a written determination that no permitted custodian is available, initially and every quarter. The adviser would also need expertise in safeguarding each asset and systems designed to prevent loss, theft, misuse or misappropriation.

Those systems would have to cover private key management, cybersecurity and joint authorization of transactions by at least two people. The proposal also calls for annual reviews of safeguards and cybersecurity controls, internal control reports, and quarterly account statements to clients whose crypto is self-custodied. For a regulated fund using its adviser’s self-custody arrangement, the fund’s board would need to oversee it and determine that the assets would receive reasonable care, initially and annually.

These conditions trade flexibility for added operational and oversight duties. Self-custody could let advisers handle assets for which the SEC says a permitted custodian is unavailable, but the adviser would take on direct responsibility for key security and safeguarding. The proposal’s conditions also give clients and fund boards more formal checks than a simple decision by an adviser to hold assets itself.

What changes if a state trust company holds the assets?

The SEC would also allow advisers and regulated funds to use state trust companies as crypto custodians, subject to conditions. Firms would need a reasonable basis, after due inquiry, to believe the company is authorized by its state banking authority to provide crypto custody and has written safeguards against theft, loss, misuse and misappropriation. They would also have to review audited financial statements and internal control reports. Regulated funds would need a custodial agreement that separates fund crypto and related cash from the trust company’s own assets.

This route expands the set of potential custodians beyond the existing permitted options described in the SEC release, while requiring firms to assess the trust company’s authority, controls and financial condition. Compared with adviser self-custody, it places day-to-day custody with another entity; compared with the existing framework, it creates a specific path for state trust companies to serve in that role. Neither route removes the need to meet the applicable safeguards.

What would happen next?

The proposal also includes modernization and reporting changes, including amendments to Forms ADV, ADV-E and N-CEN. It would permit certain required records to be kept on a crypto network if the adviser or fund can promptly provide them to the SEC in a human-readable, usable electronic format.

The SEC said public comments will remain open for 60 days after publication of the proposing release in the Federal Register. The next signals are the final comment deadline, feedback on whether the self-custody and state trust company conditions are workable, and any revisions the commission makes before deciding whether to adopt the proposal. Until then, advisers and funds have proposed routes to assess, not a new permission to rely on.

Sources and documents

• announcement of the proposal — sec.gov
• proposed rule — sec.gov