SEC Proposes Conditional Crypto Custody Rules for Investment Advisers

The US Securities and Exchange Commission (SEC) has proposed new rules for investment advisers to hold client crypto assets directly under limited conditions. The proposal, announced on October 1, aims to give advisers a compliant pathway for safeguarding digital assets. SEC Chairman Paul Atkins stated that existing rules had failed to keep pace with the growth of digital assets.

The framework would allow registered investment advisers and state trust companies to hold client crypto assets directly under certain conditions. Advisers would need to assess whether an outside custodian is unavailable before taking custody, repeating this assessment at least every quarter. They must also determine if they have the expertise to protect the specific asset.

The proposed safeguards include private-key management and joint authorization by at least two people. Advisers holding client crypto directly would need to keep each client's holdings in blockchain addresses containing only that client's assets. They must also prepare a report examining controls over their custody services, covering the safeguards used to protect client holdings.

The SEC also proposes changes to financial statement audits and broker-dealer custody services for regulated funds. The comment period will run for 60 days after publication in the Federal Register, starting with its publication date, giving respondents time to examine the proposed requirements.