The US Securities and Exchange Commission has introduced a regulatory proposal that would permit investment advisers to directly hold client crypto assets under specific, restricted circumstances. Unveiled on October 1, the proposal also establishes a mechanism enabling state trust companies to act as custodians for clients and regulated funds.
SEC Proposes Crypto Custody Rules
The SEC announced regulations targeting registered investment advisers, registered investment companies, and business development companies. The framework modifies mandates outlined in the Investment Advisers Act of 1940 and the Investment Company Act of 1940, focusing on how companies store digital assets, keep records, and satisfy reporting standards.
SEC Chairman Paul Atkins noted that current regulations have failed to keep pace with the digital asset sector. He characterized the initiative as establishing a compliant route for advisers and funds where none previously existed.
Additionally, the agency is suggesting modifications regarding financial statement audits and broker-dealer custody services for regulated funds, pairing traditional custody practices with the proposed crypto rules.
Advisers Face Self-Custody Conditions
The framework stipulates that an adviser may directly hold specific client digital assets if a suitable external custodian cannot be found. Prior to assuming custody, the adviser must verify whether a permitted provider is capable of securing that particular asset, and subsequently re-evaluate this assessment at least once every quarter.
Furthermore, the adviser must possess the requisite expertise to safeguard the particular digital asset in question. An SEC official explained that this arrangement might apply to newly introduced tokens that lack support from existing custodians, though the official noted such scenarios are expected to become rare once the system is implemented.
In this context, self-custody involves an investment adviser holding assets on behalf of clients. Utilization of this proposed allowance relies on the scarcity of external custody options and the adviser’s capacity to uphold mandated protections, requiring firms to constantly monitor their qualifications as custody alternatives evolve.
Security, Reporting Rules Take Shape
The suggested security measures dictate strict private-key management—the mechanisms that govern access to crypto assets—and mandate joint authorization by a minimum of two individuals. Furthermore, advisers holding client crypto directly must segregate each client’s holdings into distinct blockchain addresses reserved solely for that client’s property.
Advisers are also obligated to evaluate the risks inherent in self-custody and produce an assessment report detailing the controls governing their custody services, including the protections utilized for client holdings. These stipulations are integral to the requirements for direct custody.
Clients must be provided with account statements at least every quarter, detailing the blockchain networks and specific blockchain addresses associated with their digital assets. Combined, these account specifics and reporting directives serve to verify the locations where advisers store client holdings.
State Trust Companies May Hold Crypto
The regulatory blueprint additionally allows state trust companies to function as custodians for crypto assets belonging to clients and regulated funds, operating alongside the conditional self-custody provisions and proposed updates to auditing and custody standards.
Before the SEC determines whether to finalize the regulations, the proposal must undergo a public feedback phase. A 60-day comment window will commence upon the proposal’s publication in the Federal Register, granting interested parties adequate time to review the outlined specifications following the October 1 announcement.
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