SEC proposes conditional crypto self-custody for advisers and funds

The SEC proposed new crypto custody rules on Oct. 1 that could let registered investment advisers and regulated funds hold some assets themselves or use state trust companies. Under the proposal, an adviser would first check whether a qualified custodian can hold the crypto asset. If none is available, the adviser could take custody only by meeting additional safeguards. The SEC’s proposed rule covers client crypto funds and securities held by advisers, and crypto securities and similar investments held by regulated funds.

When could an adviser hold crypto itself?

The adviser would need to determine in writing that no qualified custodian is available for the asset, then revisit and record that determination at least quarterly. It would also need expertise in safeguarding that asset and systems designed to protect it from loss, theft, misuse and misappropriation.

Those systems would have to cover private-key management, require at least two people to authorize transactions, and keep each client’s crypto in network addresses holding only that client’s assets. A private key works like a key to a safe: whoever controls it can authorize movements of the crypto. The proposal would also require cybersecurity controls, an independent accountant’s internal-control report, annual reviews of the safeguards and quarterly account statements to clients.

The term “self-custody” here means the adviser holds the client’s crypto as custodian; it does not mean the investor personally controls the keys. The Block made that distinction in its report on the proposal.

What would state trust companies have to do?

An adviser or fund could place covered crypto assets with a state trust company, subject to conditions. Before relying on one, it would need a reasonable basis, after due inquiry, to believe the company has written policies for safeguarding crypto assets. Those policies must address private-key management and cybersecurity, and the adviser or fund would have to review them annually.

The adviser or fund would also need to receive and review the trust company’s latest annual financial statements before hiring it and each year afterward. The statements must follow U.S. generally accepted accounting principles and be audited by an independent public accountant.

What happens next?

This is a proposal, not a rule in force. The SEC says the public comment period will run for 60 days after the proposing release appears in the Federal Register. If adopted, the rules would amend custody requirements under the Investment Advisers Act and Investment Company Act, and update related reporting and recordkeeping obligations. The proposal therefore offers advisers and funds possible custody routes, but both the conditions and the final outcome remain subject to the rulemaking process.