SEC Crypto Custody Rules Favor Big Firms Over Small Advisers

The US Securities and Exchange Commission (SEC) has proposed new rules for crypto custody, which could have a significant impact on small investment advisers. According to the agency's economic analysis, the estimated annual cost of safeguarding assets and arranging independent oversight for these advisers could be as high as $433,833 per year. This includes the cost of an independent internal control report, which is estimated to be around $376,000 per year.

The proposal would allow advisers to hold covered client crypto assets when an eligible custodian is unavailable, subject to safeguards. However, the SEC expects that smaller advisers may elect against self-custody due to the high costs involved. In contrast, larger advisers may have sufficient resources to meet the safeguards and could potentially share costs across a larger client base or affiliated businesses.

SEC Commissioner Hester Peirce distinguished adviser 'self-custody' from investors holding their own assets. Under the proposed rules, an intermediary would hold clients' key materials, potentially including a non-controlling portion. Clients would still depend on that intermediary's safeguards.

The proposal also includes provisions for eligible state trust companies to custody crypto assets, subject to initial and annual due inquiry into authorization and safeguards. This could potentially soften the scale advantage for larger advisers.