SEC proposes guarded crypto self-custody for advisers and funds

The SEC proposed rules on Oct. 1 that would let registered investment advisers and regulated funds hold some crypto assets themselves, subject to safeguards. Under the proposal, an adviser would control the private keys needed to access and transact in a client’s crypto, instead of placing it with an eligible outside custodian. The SEC’s announcement says the rules would also let state trust companies serve as custodians for eligible assets.

A private key works like a key to a locked box: whoever controls it can authorize transfers. For crypto, those transfers happen over a network and may be hard or impossible to reverse. The SEC’s proposal says that risk, alongside the limited pool of permitted custodians, can make it difficult for advisers and funds to hold some assets under current rules.

When could an adviser hold crypto itself?

An adviser could use self-custody only after determining that a permitted custodian is unavailable for the asset. The SEC’s proposed rule would require the adviser to document that finding in writing at the start and review it quarterly. The adviser would also need expertise in safeguarding each asset and systems to protect it.

The proposed safeguards address who can move the assets and how those movements are checked. They include access restrictions, requiring multiple authorized people to act together on transactions, keeping specified transaction records and having an independent public accountant verify self-custodied assets. The SEC says the proposal is meant to address conflicts of interest as well as the risks of loss, theft and misuse.

Which crypto assets and funds are covered?

The proposal does not cover every crypto asset simply because it is digital. The SEC’s proposed rule would apply to crypto assets that qualify as funds or securities under the Investment Advisers Act. For regulated funds, the scope is securities or similar investments under the Investment Company Act. The SEC describes regulated funds as registered investment companies and business development companies.

A regulated fund could hold crypto through its adviser if the adviser met the self-custody conditions. The fund’s board would also have to oversee that arrangement. Separately, the proposal would add state trust companies as a category of permitted custodian for crypto assets, subject to conditions.

What happens before the proposal could take effect?

The SEC has proposed the rules; it has not adopted them. The agency says the public comment period will stay open for 60 days after the proposing release appears in the Federal Register. The proposal also includes changes to reporting and recordkeeping rules for advisers and funds, including reporting when they use self-custody or a state trust company.

Source material

• announcement — sec.gov
• proposed rule — sec.gov