Your keys, your problem: SEC proposes a crypto custody framework for advisers and funds
Updated: Oct 6
The Securities and Exchange Commission has proposed new rules addressing how registered investment advisers and regulated funds may custody crypto assets under the federal securities laws. The proposal amends the custody rule under the Investment Advisers Act of 1940 and related provisions of the Investment Company Act, both written decades before a digital asset existed. Advisers and regulated funds, including business development companies, have operated without a compliant custody pathway for crypto holdings since the asset class emerged; this proposal is the SEC's first attempt to close that gap through rulemaking rather than enforcement, a departure from the approach examined in the LBRY case.
What the proposal changes
The rules would update the Advisers Act custody framework in three material ways:
authorising state trust companies to act as qualified custodians for client and fund crypto holdings, expanding the custodian pool beyond federally chartered banks and registered broker-dealers;
permitting self-custody of crypto assets by an adviser or fund in limited circumstances, where no qualified custodian is reasonably available for the asset in question; and
revising financial statement audit requirements for registered investment advisers to accommodate crypto holdings.
Why now?
The timing is not incidental. The proposal arrives two weeks after the Clarity Act failed a Senate vote, and with that legislative path stalled, the SEC and CFTC have both accelerated rulemaking under existing authority. Chair Paul Atkins framed the custody proposal in those terms:
Since the advent of Bitcoin in 2008, the crypto asset market has grown from a niche curiosity into a multi-trillion-dollar asset class to which investors actively seek exposure. Unfortunately, our rules and regulations have not kept pace. To that end, today's proposal would provide a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before.
Commissioner Hester Peirce, who left the SEC on 2 October after nearly nine years as a Commissioner and head of its Crypto Task Force since January 2025, issued a separate statement arguing that the proposal uses the term self-custody in a way that does not reflect true self-custody by investors. She pressed the point further than Atkins did:
True self custody is not the right choice for everyone, but many crypto owners prize being able to custody their own assets. Regulators should zealously protect investors' right to self-custody and not attempt to force investors to custody their assets with someone else.
What NXT?
Advisers and regulated funds that hold or intend to hold crypto assets for clients should:
review existing custody arrangements against the proposed qualified custodian definition, particularly any reliance on offshore or unregistered custodians;
assess whether the limited self-custody pathway applies to their holdings, and whether their operational and security controls would meet the proposed conditions;
engage state trust company custodians now being drawn into the qualified custodian perimeter, where those arrangements are commercially relevant;
prepare comments for submission within the 60-day window following Federal Register publication, particularly on the audit requirement changes; and
watch for the further rulemaking Atkins has signalled, given this proposal is framed as one of several pending reforms rather than a complete framework.
Other jurisdictions reached this point by a different route. The EU's MiCA regime imposes custody-specific obligations on crypto-asset service providers as a condition of authorisation, and the UK's incoming cryptoasset regime, now open for authorisation applications, does the same. Cayman Islands VASPs have operated under a custody framework since the Virtual Asset (Service Providers) Act took effect. The US is arriving at a comparable destination through adviser and fund-level rulemaking rather than a market-wide licensing statute, a function of the Clarity Act's stall rather than a considered policy choice to proceed differently.
