SEC Proposes 760-Page Plan to Regulate Crypto Custodians

The Securities and Exchange Commission (SEC) has proposed a 760-page plan to regulate crypto custodians by investment advisers and regulated investment vehicles. The plan, which will update both the Investment Advisers Act and the Investment Company Act of 1940, will establish rules regarding custodians, the separation between client assets and those of a manager, and the necessary documentation. The proposal allows state trust companies to act as custodians, and advisers may hold crypto assets directly in limited cases, such as when no approved custodian is available and the firm has the required skills.

The SEC proposal aims to provide clear rules for crypto custody, which is crucial for investors, as their assets can be lost forever if keys are stolen or misplaced. Regulators want to ensure that managers can offer more crypto strategies without leaving client assets at risk. While custody is safer, it's not risk-free, and investors should be aware of the potential risks, such as hacks, lost keys, and custodian failure.

Investors should carefully choose a custodian by verifying their license, checking key management, looking for separate accounts, and reviewing audit reports. The SEC proposal is still in the proposal stage, and public comment and a final vote are expected next.