SKN | SEC Proposes Crypto Custody Rules for Investment Advisers and Funds

Key Points:

• The SEC proposed a new crypto custody framework that would establish clearer requirements for investment advisers and regulated funds holding digital assets.
• The proposal would allow limited adviser self-custody when no qualified custodian is available and permit state-chartered trust companies to serve as crypto custodians.
• The 760-page proposal arrives as the SEC expands its digital-asset rulemaking agenda and as Commissioner Hester Peirce prepares to leave the agency.

The U.S. Securities and Exchange Commission has proposed a new framework governing how investment advisers and regulated funds can custody crypto assets, adding another major component to its evolving digital-asset regulatory agenda. The proposal could give professional asset managers clearer pathways for holding client crypto while introducing specific requirements around custody, recordkeeping, disclosures and oversight.

SEC Targets a Longstanding Custody Gap

The SEC’s 760-page proposal seeks to adapt custody requirements under the Investment Advisers Act and Investment Company Act to digital assets. Existing rules were designed primarily around traditional securities and financial assets, creating uncertainty over whether and how advisers and funds could hold crypto assets under regulated custody arrangements.

Under the proposed framework, advisers and regulated funds would have clearer options for using qualified custodians while the SEC would establish requirements governing how crypto assets are held, records are maintained and federal disclosures are made. The agency also proposes additional auditing and industry-practice requirements intended to address the operational characteristics of digital assets.

Limited Self-Custody Would Be Permitted

One of the proposal’s most significant elements is a limited pathway for adviser self-custody. The provision would apply when an adviser cannot find a qualified custodian willing and able to hold a particular crypto asset, potentially including newly launched tokens that custodians do not yet support.

The exemption would not provide unrestricted control. An adviser would need to demonstrate appropriate expertise, and its self-custody arrangement would have to be reviewed every quarter to determine whether a qualified custodian had become available.

This distinction matters for institutions because self-custody would remain an exception rather than the standard model. The proposed structure attempts to address gaps in institutional custody infrastructure without removing the underlying emphasis on protecting client assets from loss, theft, misuse and misappropriation.

State Trust Companies Gain a Formal Pathway

The SEC would also permit state-chartered trust companies to serve as crypto custodians under the proposed framework. The move formalizes a custody route that has already received regulatory attention and could expand the pool of institutions available to advisers and funds seeking regulated digital-asset custody.

For professional investors, broader custody options could affect how funds structure their operational relationships with exchanges, custodians and other infrastructure providers. The significance is less about changing crypto prices directly and more about reducing uncertainty around the institutional plumbing required to hold digital assets within regulated investment structures.

Proposal Extends SEC’s Broader Crypto Agenda

The custody proposal follows several other SEC initiatives. Last month, the agency introduced an Innovation Exemption for certain tokenized securities, while in August it proposed Regulation Crypto Assets, establishing a tailored framework for certain crypto-related investment contracts.

The custody proposal is open for a 60-day public comment period, meaning its provisions could change before any final rule is adopted. It also arrives just before Commissioner Hester Peirce, the SEC’s inaugural Crypto Task Force chief, leaves the agency. The SEC recently reduced the number of commissioners required for a quorum from three to two, allowing the agency to continue taking action with its smaller commission.

For institutional crypto markets, the next phase will center on the public comment process, final custody requirements and the availability of qualified custodians. If adopted, the framework could provide asset managers with greater clarity over how digital assets can be incorporated into regulated investment structures. Until then, the proposal remains a regulatory framework under consideration rather than a finalized set of requirements.