SEC proposes new crypto custody path for advisers and funds

The SEC has proposed new rules for how investment advisers and regulated funds can hold some crypto assets, a move that could give them more ways to offer crypto investments while setting safeguards for clients. The proposal, announced on Oct. 1, would allow advisers to hold certain assets themselves when no permitted custodian is available. It is not final. The SEC’s announcement says the changes are intended to modernize custody rules and expand investor choice.

Which crypto assets would the proposal cover?

The proposal would not apply to every crypto asset. Under the SEC’s proposed custody rules, adviser rules would cover crypto assets that are client funds or securities. For regulated funds, the rules would cover crypto assets that are securities or similar investments. A crypto asset’s status under federal securities laws affects whether it falls within the proposal.

The proposal covers registered investment advisers and regulated funds, which include registered investment companies and business development companies. The SEC says the changes could let advisers provide crypto-related investment advice and let funds offer a wider range of crypto investment strategies.

When could an adviser hold crypto itself?

An adviser could use self-custody only if it meets proposed conditions. It would first have to determine in writing that a permitted custodian is unavailable, both at the outset and every quarter. It would also need expertise and systems to safeguard the asset and review those systems each year. If a regulated fund’s adviser holds the fund’s crypto, the fund’s board would need to oversee the arrangement.

Self-custody means the adviser controls the private keys needed to access and move the crypto without using a permitted custodian. The SEC’s proposal also cites safeguards such as records, cybersecurity protections, account statements and client disclosures.

What other custody options and next steps are proposed?

The proposal would let state trust companies serve as custodians for client and fund crypto assets, subject to conditions. It would also allow advisers and funds to keep required records on a crypto network if they can provide them promptly to the SEC in a readable, usable electronic format.

The SEC says it is seeking public comment. The comment period would stay open for 60 days after the proposal appears in the Federal Register. Until the SEC adopts a final rule, the proposed changes do not create a new custody option.