The Securities and Exchange Commission has proposed new rules and amendments addressing how registered investment advisers and regulated funds may custody crypto assets.
The proposal would create a more tailored framework for crypto custody while modernizing existing requirements under the Investment Advisers Act and Investment Company Act. It could expand the custody options available to advisers, registered investment companies, and business development companies.
However, the proposal is not a final rule. Current custody requirements remain in effect while the SEC reviews public comments and determines whether to adopt the changes.
What Would the Proposal Change?
The SEC’s October 1 proposal addresses several areas in which existing custody rules may not align with the characteristics of crypto assets.
The proposed framework would:
- Permit advisers and regulated funds to self-custody crypto assets under certain conditions
- Allow state trust companies to serve as custodians for client and fund crypto assets
- Modernize financial statement audit and internal control requirements
- Update custody-related recordkeeping and regulatory reporting
Existing custody rules were largely developed around traditional assets held by banks, broker-dealers, and other established custodians. Crypto assets present different operational risks, including how private keys are controlled, how assets are segregated, and how ownership can be verified.
The proposal is intended to provide clearer custody options while continuing to protect client and fund assets from theft, loss, misuse, and misappropriation.
Self-Custody and State Trust Companies
The proposal would establish conditions under which registered advisers and regulated funds could self-custody crypto assets.
Those conditions would address areas such as:
- Safeguarding systems and expertise
- Cybersecurity controls
- Annual reviews and internal control reports
- Client account statements and asset verification
Self-custody would therefore require more than maintaining access to a digital wallet. Firms would need controls designed to protect private keys, restrict access, document transactions, segregate assets, and respond to cybersecurity incidents.
The proposal would also permit state trust companies to custody crypto assets. Before using one, advisers and funds would need to evaluate whether the custodian is properly authorized and maintains appropriate safeguarding controls.
That review could include the custodian’s financial condition, internal control reports, cybersecurity practices, asset segregation, private key management, and procedures for addressing theft or loss.
Other Proposed Updates
The SEC is also proposing changes affecting financial statement audits, broker-dealer custodial services for regulated funds, and custody-related reporting.
The proposal would amend Form ADV for registered investment advisers and Form N-CEN for regulated funds. It would also add reporting related to tokenized private funds and regulated investment company shares.
These changes could affect more than firms actively offering crypto investment strategies. Advisers and funds may need to determine whether tokenized assets, wallet access, trading authority, or other arrangements create custody or reporting obligations.
What Should Compliance Teams Review?
No immediate policy changes are required, but firms can begin identifying where the proposal could affect their operations.
Compliance teams should consider:
- Mapping current custody arrangements: Identify where crypto assets are held, who controls access, and which parties can authorize transactions.
- Reviewing safeguarding controls: Evaluate private key security, access restrictions, asset segregation, incident response, and transaction documentation.
- Assessing custodians: Determine how the firm evaluates authorization
