SKN | SEC Proposes New Crypto Custody Rules to Remove Barriers for Investment Advisers

Key Takeaways

• The SEC has proposed a tailored crypto custody framework that would expand how registered investment advisers and regulated funds can safeguard eligible digital assets.
• The proposal would permit qualified self-custody in limited circumstances and allow the use of state trust companies, subject to specified conditions and safeguards.
• The 60-day public comment period will give market participants an opportunity to shape rules that could influence institutional access, custody competition and crypto investment products.

The U.S. Securities and Exchange Commission has proposed new rules designed to resolve a longstanding custody challenge for investment advisers seeking to offer cryptocurrency exposure to clients. Announced on October 1, the proposal would update requirements under two federal securities laws, reflecting the expansion of digital assets into a multitrillion-dollar market while maintaining safeguards against theft, misuse and misappropriation.

SEC Proposal Expands Crypto Custody Options

The proposed framework would amend the Investment Advisers Act of 1940 and the Investment Company Act of 1940, creating more flexibility for registered investment advisers, investment companies and business development companies managing eligible crypto assets.

Under the plan, advisers and regulated funds could use state trust companies as custodians, subject to specified requirements. The proposal would also permit a limited form of self-custody when an adviser determines that no permitted custodian is available for a particular asset. That determination would need to be reassessed quarterly.

The distinction matters because traditional custody rules were designed around conventional securities and financial institutions. Digital assets introduce different operational challenges, including private-key management, blockchain transfers and the possibility that lost or compromised credentials cannot be recovered.

Investor Protection Remains Central

The proposal seeks to balance wider custody access with safeguards covering asset segregation, recordkeeping, disclosures and financial statement audits. The SEC is also proposing updates to broker-dealer custodial services for regulated funds, alongside amendments intended to modernize requirements that have remained largely unchanged for decades.

Importantly, the framework is still a proposal, not a final rule. The public comment period will remain open for 60 days after publication in the Federal Register, allowing advisers, custodians, fund managers and investors to respond before the commission considers further action.

The proposal also does not automatically cover every digital asset. Its scope depends on the relevant statutory definitions: the proposed Advisers Act amendments would apply to crypto assets that qualify as funds or securities, while the regulated-fund provisions would apply to securities and similar investments.

Institutional Adoption and Market Structure

For institutional investors, custody availability is more than an operational detail. It affects whether advisers can build compliant strategies, select service providers and meet fiduciary obligations when managing digital assets. A broader pool of eligible custodians could also increase competition over pricing, security controls and service quality.

The proposal arrives as crypto markets continue to develop products for professional investors, including exchange-traded funds and tokenized financial instruments. However, custody reform alone will not guarantee new allocations: investment mandates, liquidity, valuation, compliance costs and market volatility will remain important considerations.

What Comes Next for Crypto Custody

The SEC’s proposal could provide advisers with a more practical route to managing eligible crypto assets, but its eventual impact will depend on the final requirements and how institutions implement them. The next milestones are the publication of the proposal in the Federal Register, the 60-day comment period and subsequent commission deliberations. For crypto investors, the central question is whether expanded custody options can improve institutional access without weakening the controls designed to protect client assets.