SEC proposes new custody path for crypto advisers and funds

The SEC proposed new rules on Oct. 1 that would let registered investment advisers and regulated funds hold some crypto assets themselves or use state trust companies as custodians. The proposal could widen custody options for crypto investments, but its rules are not in force. The SEC’s announcement of the proposal says it covers registered investment companies and business development companies, as well as advisers’ clients.

Which crypto assets would the proposal cover?

The proposal applies to crypto assets that fall within the securities laws’ custody rules, rather than every crypto asset. The SEC’s proposed rule says the adviser rule would cover client crypto assets that are funds or securities. For regulated funds, the rules would cover crypto securities and similar investments.

The SEC is proposing changes under the Investment Advisers Act and the Investment Company Act. It says the changes are intended to address limits in existing custody rules that can make it harder for advisers and funds to hold some crypto assets.

When could an adviser hold crypto itself?

An adviser could self-custody a client’s covered crypto asset only under conditions. It would first have to determine in writing that a permitted custodian is unavailable, then repeat that determination quarterly. The proposal also calls for the adviser to have expertise and systems to safeguard the assets, and to review those systems each year.

For a regulated fund, the fund’s board would also have to oversee the arrangement. The proposal describes self-custody as an adviser holding the private keys needed to access and transact in a crypto asset without keeping it with a permitted custodian.

What would change for outside custodians?

The SEC would add state trust companies as a permitted category of custodian for crypto assets, subject to conditions in the proposal. It also proposes updates to custody rules, reporting and recordkeeping. The agency says records could be kept on a crypto network if advisers and funds can provide them promptly to the SEC in a readable, usable format.

The proposal is open for public comment for 60 days after its publication in the Federal Register, according to the SEC. That period has not been tied to a calendar deadline in the agency’s announcement. The SEC has not adopted the rules.

Sources and documents

• announcement of the proposal — sec.gov
• proposed rule — sec.gov