SEC proposes crypto custody rules for advisers and funds

The SEC proposed new rules on Oct. 1 that could let registered investment advisers and regulated funds hold some crypto assets themselves or use state trust companies as custodians. The proposal would change how these firms safeguard crypto investments covered by federal securities laws, according to the SEC’s announcement.

When could an adviser hold a client’s crypto?

The SEC’s proposal would let advisers hold crypto for clients when a permitted custodian is unavailable, subject to safeguards. Here, custody means holding the crypto or the private keys needed to access and move it. The adviser would have to confirm that no permitted custodian is available both at the outset and each quarter, according to the SEC’s proposed rule.

The adviser would also need relevant expertise and systems to guard against loss, theft, misuse or misappropriation. It would have to document its expertise and review its safeguards each year. For a regulated fund that uses its adviser to hold crypto, the fund’s board would need to oversee the arrangement and decide beforehand that the adviser can take reasonable care of the asset.

The proposal would also let state trust companies serve as custodians for client and fund crypto assets, subject to conditions. Those options are meant to widen the pool of permitted custodians. The SEC says current limits can prevent advisers from investing in some crypto assets for clients when an eligible custodian is unavailable.

Which crypto assets would the proposal cover?

The rules would apply only to crypto assets that fall within existing securities law categories. For advisers, the changes would cover crypto assets that are funds or securities; for regulated funds, they would cover securities and similar investments. The proposal would not establish custody rules for every crypto asset simply because it is digital.

The SEC also proposed changes to reporting and recordkeeping. Advisers and funds could keep required records on a crypto network if they can promptly provide them to the Commission in a readable, usable electronic format. Proposed form changes would require advisers and funds to report certain crypto custody practices, including self-custody and use of a state trust company.

The proposal is not yet in force. The SEC says the public comment period will run for 60 days after the proposal appears in the Federal Register. The commission would have to consider the proposal and comments before finalizing any changes.