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Key Takeaways
- The SEC’s custody concept is an early administrative step under White House budget office review, not yet a formal rule proposal
- The original 2023 proposal under Gary Gensler would have limited qualified custodians to banks, trust companies, and regulated broker-dealers, but drew broad industry opposition and was withdrawn last year
- Current Chairman Paul Atkins has prioritized crypto-friendly rules, with an SEC estimate targeting October for the new custody proposal, though such timelines have often slipped
The U.S. Securities and Exchange Commission has sent a preliminary custody rule concept to the White House for review, restarting an effort to regulate where investment advisers can hold clients’ crypto assets. The push follows the collapse of a similar 2023 proposal that drew fierce industry opposition and was formally withdrawn last year.
A Preliminary Step, Not a Formal Proposal
The SEC’s action this week amounts to an early administrative step rather than a public rule proposal. The agency sent its custody concept to the White House Office of Management and Budget, where it will remain under review before the SEC can move to formally propose the rule.
According to the agency’s public regulatory agenda, the future effort would modernize custody regulations for investment adviser and fund client assets, including crypto assets specifically. The agenda describes an intent to remove burdens from outdated provisions the agency says are no longer necessary given how securities trading and holding practices have evolved.
That language offers few specifics about what the rule will actually require. The tone, however, points toward an agency continuing its broader pattern of easing compliance requirements for crypto businesses rather than tightening them, a marked shift from the approach the SEC took under its previous leadership.
The 2023 Effort Collapsed Under Industry Pressure
Then-SEC Chair Gary Gensler announced the agency’s original custody proposal in February 2023, pairing it with a pointed warning to the crypto industry. In reference to crypto trading platforms, Gensler said:
“Investment advisers cannot rely on them as qualified custodians.”
The 2023 proposal would have required investment advisers to place client cryptocurrency with a narrow set of qualified custodians, generally limited to chartered banks and trust companies, SEC-registered broker-dealers, or futures commission merchants regulated by the Commodity Futures Trading Commission.
That structure would have excluded many crypto-native platforms investment advisers were already using to hold digital assets.
The proposal drew opposition from an unusually broad coalition. Attorneys at the Small Business Administration told the SEC the agency’s approach risked underestimating its true impact on smaller advisory firms, warning it “drastically underestimates potential impacts.” Investment firm a16z went further, calling the proposal “illegal, infeasible, and dangerous.”
The proposal never received final approval before Gensler departed the agency, and the SEC formally withdrew it last year.
Atkins Has Made Crypto-Friendly Rules a Signature Effort
Current SEC Chairman Paul Atkins has prioritized friendlier crypto regulation throughout his tenure, and the custody proposal represents one piece of a broader agenda.
Since the original 2023 effort, the crypto industry has secured a wave of new federal trust bank charters, expanding the pool of institutions equipped to handle crypto custody under existing banking frameworks.
The SEC recently released a separate proposed rule called Regulation Crypto Assets, the agency’s first major crypto-specific rule under Atkins.
The financial industry is also awaiting the SEC’s next move on a tokenization exemption Atkins has promised for months, and the agency’s broader regulatory agenda includes a near-term proposal aimed at clarifying crypto compliance requirements for broker-dealers.
Timeline Estimates Carry a History of Slipping
The SEC’s regulatory disclosure suggests an October target for the custody proposal, though the agency’s own track record with such estimates is mixed. The Regulation Crypto Assets rule, for comparison, was originally listed on the agency’s agenda for an April release before it was ultimately proposed in August, a four-month slip on a rule that did eventually move forward.
Other SEC rule proposals have taken far longer to advance than initial estimates suggested, and some listed items have never been formally proposed at all. The October date attached to the custody proposal should be read as an agency estimate rather than a firm commitment, particularly given how early-stage the current review remains.
What Comes Next
The custody concept must clear White House budget office review before the SEC can formally propose a rule, a process that has no fixed timeline and could still result in significant changes to the agency’s approach.
Whether the new version avoids the industry backlash that doomed the 2023 proposal will depend heavily on details the SEC has not yet disclosed. This includes whether the rule maintains a narrow definition of qualified custodians or expands it to include a wider range of crypto-native platforms.
