SEC proposal opens conditional crypto self-custody for advisers

The Securities and Exchange Commission proposed new custody rules on Oct. 1 that would let registered investment advisers and regulated funds hold some crypto assets themselves when no permitted custodian is available. The SEC’s proposed custody rules also add state trust companies as a possible custodian category and revise related reporting requirements. The changes are proposals, not rules in effect.

Which assets and firms would the proposal cover?

The proposal addresses registered advisers’ custody of client crypto funds and securities, and registered investment companies’ and business development companies’ custody of crypto securities and similar investments. The SEC says it would not cover every crypto asset: its proposed adviser rule applies to crypto assets that are funds or securities, while the proposed fund rules apply to securities or similar investments.

Under the current framework described by the SEC, client and fund assets generally must be held by certain permitted custodians. The agency says that where those custodians are unavailable, advisers may be unable to invest client assets in some crypto or provide exposure through a regulated fund. The proposal would expand the available routes while retaining conditions meant to protect assets.

When could an adviser hold crypto directly?

An adviser could self-custody only after determining in writing, initially and quarterly, that a permitted custodian is unavailable for the asset. The SEC defines this as the adviser holding the crypto through possession of private keys needed to access and transact in it. As The Block reported, that use of “self-custody” means the adviser acts as custodian; it does not mean the client personally controls the keys.

The proposed safeguards include documented expertise and systems for protecting each asset, annual reviews of those systems, cybersecurity controls, and internal control reports. Transactions would need joint authorization by at least two people, and each client’s crypto would be held at addresses corresponding only to that client’s assets. Advisers would also send clients account statements at least quarterly. For a regulated fund using adviser custody, the fund’s board would oversee the arrangement.

The proposal would also let advisers and funds use qualifying state trust companies. They would have to check that the company is authorized by its state to custody crypto and has safeguards addressing private-key management and cybersecurity; annual reviews and audited financial statements are among the proposed conditions.

What happens next, and what should advisers watch?

The SEC is seeking public comment, with a 60-day comment period reported by The Block. The main trade-off is clear in the proposal: more custody options could let advisers offer exposure to assets they otherwise could not hold, while direct adviser custody places more responsibility on firms to manage keys, controls and conflicts. Watch for comments on whether those safeguards are workable, how many assets lack an available permitted custodian, and whether the SEC changes the conditions before deciding on a final rule.