SEC Proposes Crypto Self-Custody Rules

The U.S. Securities and Exchange Commission has proposed new crypto custody rules that would let registered investment advisers and regulated funds hold certain digital assets through their own advisers when no permitted custodian is available.

The Oct. 1 proposal would also allow eligible state trust companies to act as crypto custodians, giving asset managers another route for holding covered digital assets under federal custody rules.

Advisers Could Self-Custody When no Permitted Custodian is Available

Under the proposal, an investment adviser could self-custody covered client crypto assets after determining that no permitted custodian is available to maintain the asset. The exemption would not apply simply because using an outside custodian is more expensive.

Advisers would need to reassess the market at least quarterly. If a permitted custodian becomes available, the assets would have to be transferred to that provider as soon as reasonably practicable.

Advisers using self-custody would also need expertise and systems designed to protect assets from theft, loss, misuse, and misappropriation.

Fund Boards Would Oversee Adviser Self-Custody Arrangements

Registered investment companies and business development companies could hold covered crypto assets with their investment adviser instead of an outside custodian when the adviser meets the proposed requirements.

Fund boards would oversee those arrangements. Advisers would need to provide written information explaining why no permitted custodian is available and how their systems protect the assets.

Boards would also assess whether the arrangement provides reasonable care, including the adviser’s security controls, outside service providers and any insurance or reimbursement available if assets are lost.

State Trust Companies Could Qualify as Crypto Custodians

The SEC also proposes allowing eligible state trust companies to custody covered client and fund crypto assets after additional due diligence.

Before using one, advisers or funds would need a reasonable basis to believe the trust company is authorized by its state to custody crypto and maintains appropriate private-key and cybersecurity safeguards. Those controls would be reviewed at least annually.

The rules are not final. The SEC will accept public comments for 60 days after the proposal is published in the Federal Register before deciding whether to revise or adopt the framework.