SEC Proposes Allowing Investment Advisers to Self-Custody Client Crypto

The U.S. Securities and Exchange Commission has proposed rules that would allow investment advisers and regulated funds to hold certain client crypto assets themselves when no permitted custodian is available, while also expanding custody options to state trust companies.

The proposal, announced on Oct. 1, would establish a crypto-specific custody framework under the Investment Advisers Act of 1940 and Investment Company Act of 1940. The SEC said the changes are intended to address custody arrangements that are not adequately covered by existing rules.

SEC Sets Conditions for Crypto Self-Custody

Under the proposal, an investment adviser could take custody of a client's crypto assets when it determines that no permitted custodian is available for the particular asset. That determination would have to be reassessed quarterly, according to the proposed framework.

Self-custody would not be unrestricted. The proposal includes safeguards covering private-key management, cybersecurity, segregation of client holdings and internal controls. Transfers of self-custodied crypto assets would require approval from at least two authorized individuals, according to Cointelegraph's report on the proposal.

SEC Commissioner Mark Uyeda said the framework recognizes that custody options may be unavailable for certain newer crypto assets, while maintaining advisers' fiduciary obligations. He also pointed to the inherent conflict created when an adviser becomes the custodian of client assets.

The SEC's proposal would apply only to crypto assets that fall within the relevant custody requirements. The agency's proposing release notes that the Advisers Act provisions would cover crypto assets that are funds or securities, while the Investment Company Act provisions would apply to securities or similar investments.

State Trust Companies Could Become Crypto Custodians

The SEC is also proposing to permit state trust companies to serve as custodians for client and regulated-fund crypto assets, subject to specific conditions.

Before engaging a state trust company, an adviser or regulated fund would need a reasonable basis, after due inquiry, to believe that the company is authorized by the relevant state banking authority to provide crypto custody. The proposed rules would also require appropriate written policies and procedures designed to safeguard crypto assets against loss, theft, misuse and misappropriation.

The proposal would further require safeguards around asset segregation and financial and internal-control reporting. The SEC's approach would formally expand the types of institutions that can provide crypto custody under the federal framework.

Public Comment Period to Follow

The SEC said the proposed rules would modernize existing custody requirements while providing investment advisers and regulated funds with additional options for handling crypto assets. SEC Chairman Paul Atkins said the agency's existing framework had not kept pace with the development of the crypto asset market.

The proposal remains subject to the federal rulemaking process. The SEC said the public comment period will remain open for 60 days after publication of the proposing release in the Federal Register

Cointelegraph

Writer: Ethan Collins
Crypto Journalist
Ethan Collins reports on developments across the cryptocurrency and blockchain sector. His work covers market movements, protocol updates, regulatory changes, and emerging trends in digital assets.
He focuses on presenting complex topics in a clear and accessible manner for a broad readership.