The SEC’s proposed crypto-custody framework would allow advisers to hold clients’ assets directly only in limited cases: when no qualified custodian is available for a specific asset, and subject to reviews and transfer safeguards.
- Advisers would reassess custodian availability every quarter.
- At least two authorized people would have to approve transfers.
- Qualifying state trust companies could serve as custodians.
- The proposal is not final. A 60-day comment period will follow Federal Register publication.
A narrow route to adviser self-custody
SEC Chairman Paul S. Atkins announced the proposal on Thursday. The SEC said the framework would give advisers and funds “a compliant pathway where none existed before” to hold crypto.
Under the proposal, an investment adviser could hold a client’s crypto itself only if no qualified custodian is available for that asset. The adviser would have to check availability every quarter and move the assets to a qualified custodian once one becomes available. At least two authorized individuals would need to approve any transfer from assets held by the adviser.
The proposal would also let regulated funds hold crypto through their adviser under the same conditions, with oversight from the fund’s board. That does not mean every adviser or fund could hold every crypto asset directly. The permission would depend on the proposal’s conditions and whether a qualified custodian is available for the asset.
Custody means more than storing a private key. It covers how assets are safeguarded and who has the legal or practical authority to access or transfer them. Control of a key can be central to that authority, but possessing a key alone does not establish ownership or grant unlimited permission to move client funds.
State trust companies could qualify
The proposal would let state trust companies serve as crypto custodians if they are authorized by their state, maintain safeguards against loss and theft, keep audited financial statements, and separate client holdings from their own assets.
These conditions address basic custody risks: whether assets are protected, whether a custodian’s finances can be scrutinized, and whether client property is kept separate from the company’s. How the requirements are applied, and which providers qualify for particular assets, will matter as advisers weigh their options.
Custody also creates conflicts
Commissioner Mark Uyeda said adviser custody creates “an inherent conflict of interest.” An adviser holding client assets may face incentives or risks that differ from those of its clients. The proposal’s controls are meant to address custody risks, but independent scrutiny would still matter.
Uyeda said advisers’ fiduciary duties would continue to apply. Holding the assets would not relieve an adviser of its obligations to clients. How those duties interact with the proposed custody requirements will be a practical question for advisers and regulators.
The proposal arrives amid a commission transition
Commissioner Hester Peirce, who leads the SEC’s crypto task force, is reportedly leaving for a professorship in Virginia. The SEC is preparing to operate with two commissioners: Chairman Paul S. Atkins and Commissioner Mark Uyeda.
Earlier in the week, the SEC reportedly reduced its quorum requirement from three commissioners to two. Reports also say a single commissioner may act if one of the two is recused or conflicted. That does not, by itself, establish that one commissioner can exercise the full commission’s authority. The scope and practical effect of the change remain unclear.
What happens next?
The custody framework is still a proposal, not a final rule. A 60-day public comment period will begin after publication in the Federal Register. The publication date has not been specified, so the start of the comment period is not yet clear.
Comments from advisers, custodians, funds, and the public can help inform the SEC’s decision on final requirements. Key questions include which providers qualify for a given asset and how the safeguards will work in practice.
Key questions and answers
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Can advisers hold clients’ crypto themselves?
Under the proposal, only when no qualified custodian is available for that asset. Advisers would check availability quarterly and transfer the assets to a qualified custodian once one becomes available.
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What approval would transfers require?
At least two authorized individuals would need to approve a transfer from assets held by the adviser.
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Could a state trust company custody crypto?
Yes, if it is authorized by its state and meets the proposal’s requirements for safeguards, audited financial statements, and separation of client assets from its own.
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Is the proposal in force?
No. It remains a proposal. The 60-day public comment period will begin after publication in the Federal Register.
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What remains uncertain?
The publication date, which providers qualify for particular assets, and how the requirements will work in practice. The SEC’s final rules may change after the comment period.
