SEC proposes new crypto custody routes for advisers and funds

The SEC proposed new rules on Oct. 1 for how registered investment advisers and regulated funds may custody crypto assets, creating routes for adviser self-custody and state trust company custody under specified safeguards. The agency said the proposal is intended to address barriers to crypto-related investment advice and fund strategies. Its announcement of the proposal describes a framework that is not yet in force.

When could an adviser hold crypto itself?

Under the proposal, an adviser would first have to determine in writing that a qualified custodian is unavailable for the crypto asset, then revisit that determination at least quarterly. The adviser would also need expertise in safeguarding that asset and systems designed to protect it from loss, theft, misuse and misappropriation.

The SEC’s proposed rule specifies core controls: private key management, authorization of each transaction by at least two people, and separate blockchain addresses for each client’s crypto. Advisers would also need cybersecurity controls, an annual internal control report from an independent public accountant, and quarterly account statements for clients. For a regulated fund’s crypto held by its adviser, the fund’s board would also oversee the self-custody arrangement.

What safeguards would apply to state trust companies?

An adviser or regulated fund could use a state trust company to custody crypto under the proposal. Before doing so, it would need a reasonable basis, after due inquiry, to believe the company is authorized under state law to provide crypto custody and maintains safeguards that address private key management and cybersecurity. The adviser or fund would also have to review the trust company’s audited financial statements before engaging it and annually.

When would the proposal take effect?

The SEC has proposed the framework; it has not adopted it. The comment period would run for 60 days after the proposing release is published in the Federal Register. The proposed rules cover registered advisers’ client crypto funds and securities, and regulated funds’ crypto securities and similar investments.