SEC Proposes Easier Custody Rules for Investment Advisers Handling Crypto
The US Securities and Exchange Commission (SEC) has unveiled a proposal aimed at easing custody regulations for investment advisers and funds dealing with cryptocurrencies. The proposal would permit advisers to hold clients’ crypto assets themselves if no qualified custodian is available, and allow state trust companies to act as crypto custodians. This move addresses a significant regulatory obstacle and aims to foster the growth of digital asset investments in the US market.
Background and Context of the Initiative
The crypto asset market has evolved from a niche interest to a multi-trillion-dollar asset class that investors increasingly want exposure to, according to SEC Chair Paul Atkins. However, current rules and regulations have not kept pace with this expansion. The scarcity of qualified crypto custodians has posed a tangible barrier for investment advisers when constructing and managing client portfolios. Industry groups such as the Digital Chamber have previously highlighted this issue; in May 2025, they submitted remarks to the SEC urging to address this custodian shortage since some advisers had declined allocations to particular tokens or requested portfolio companies to hold assets until suitable custody became available. SEC Commissioner Hester Peirce characterized the situation as a regulatory "roller coaster," emphasizing how advisers have endured uncertainty while awaiting clear custody guidelines.
Proposed Measures for Self-Custody of Assets
The SEC proposal would allow investment advisers to hold clients’ crypto assets themselves if no eligible custodian exists for a given asset, contingent upon verification of that unavailability and quarterly reassessment. Should a qualified custodian become available, advisers must transfer the assets promptly. The framework imposes rigorous safeguards for self-custody, including protection of private keys, cybersecurity measures, segregation of client holdings, and requiring at least two authorized parties to approve any transfer of assets. Commissioner Mark Uyeda noted the inherent conflicts of interest in adviser custody but reaffirmed that fiduciary duties remain in force. Moreover, regulated funds could maintain crypto holdings in self-custody with their investment adviser, provided the adviser complies with self-custody requirements and the fund’s board oversees the arrangement.
Option to Use State Trust Companies as Custodians
The proposal additionally introduces the use of state trust companies—financial entities licensed by a US state to manage assets on behalf of third parties—as crypto custodians under defined conditions. These entities must be authorized by the relevant state authority to provide crypto custody services, maintain robust procedures to safeguard digital assets against loss, theft, or misappropriation, produce audited financial statements and internal control reports, and ensure client assets are segregated from the company’s own holdings.
Changes to Audit, Recordkeeping, and Disclosure
SEC’s proposal also includes amendments to audit protocols, recordkeeping, and disclosure obligations, aimed at enhancing transparency and investor protection in crypto-related investment activities. The SEC has announced a 60-day public comment period following publication of the proposal in the Federal Register, inviting stakeholder feedback before finalization.
Regulatory Landscape and Future Outlook
These developments form part of broader efforts by the SEC and the Commodity Futures Trading Commission (CFTC) to clarify regulatory frameworks for crypto markets within their existing statutory mandates. This is especially significant after the recent failure of the CLARITY Act to pass the Senate. The CFTC has submitted its own crypto market proposal for White House review, while the SEC has recently enabled trading of tokenized stocks, underscoring a growing momentum in formalizing regulatory approaches to digital assets.
Why it matters
The SEC’s proposal seeks to remove a major barrier hindering the growth of crypto investments — the shortage of qualified custodians for digital assets. By permitting advisers to self-custody under strict safeguards and by recognizing state trust companies as eligible custodians, the regulator addresses practical market demands. This paves the way for broader investor access to cryptocurrencies by reducing operational and regulatory complexities. Enhanced clarity and transparency in custody rules will facilitate the integration of crypto assets into the traditional financial ecosystem and lay groundwork for the industry’s further expansion in the United States.
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