SEC Proposes Crypto Custody Framework Amid Regulatory Uncertainty

The U.S. Securities and Exchange Commission (SEC) has proposed a new regulatory framework for crypto, aiming to make it easier for registered investment advisers and regulated funds to get exposure to the asset class on behalf of clients. The framework would amend custody requirements under the Investment Advisers Act of 1940 and the Investment Company Act of 1940.

According to the proposal, advisers would be allowed to self-custody certain crypto assets when an appropriate outside custodian is unavailable. State-chartered trust companies would also receive a pathway to be crypto custodians. SEC Chairman Paul Atkins stated that existing custody rules were built around a financial system that looked very different from today's, with Bitcoin not existing when much of the framework was developed.

The proposal aims to replace regulatory uncertainty surrounding crypto custody with a defined compliance framework for investment advisers and funds. Atkins said the existing rules had been 'crafted for a bygone era.' The proposal does not give investment advisers unrestricted permission to hold private keys themselves, but instead requires advisers to first determine that a permitted custodian is unavailable for the particular crypto asset.

Self-custody would function as a conditional alternative, with advisers needing to show that they have the necessary expertise to safeguard the specific crypto asset. Custodians would have to address private-key management and joint authorization by at least two people. Advisers would also have to maintain each client's crypto in one or more blockchain addresses containing only that client's assets.

The proposal remains just a proposal, and the public will have 60 days to submit comments in the Federal Register.