SEC Proposes Crypto Custody Plan with Self-Custody Option

The US Securities and Exchange Commission (SEC) has unveiled a new crypto custody plan aimed at addressing the limited availability of custodians for certain digital assets. The proposal, which was issued on October 1 under the Investment Advisers Act and Investment Company Act, would allow advisers to use self-custody when qualified custodians cannot hold specific crypto assets.

Under the proposed framework, an adviser would need to establish that no permitted custodian can hold the relevant crypto asset. The adviser would then reassess this finding every quarter. If an eligible custodian later becomes available, the adviser would be required to move the asset within a reasonable period.

The SEC proposal would require advisers to protect private keys and maintain cybersecurity measures, including separate handling of each client's assets to prevent improper mixing. At least two authorized people would need to approve transfers involving self-custodied crypto. Regulated funds could also use adviser self-custody under the proposed framework, but the adviser would need to meet custody requirements while the fund's board oversees the arrangement.

The SEC would also recognize state-chartered trust companies as potential crypto custodians, requiring them to have state authorization and procedures designed to protect assets from loss, theft, or misuse. These firms would also need audited financial statements and internal control reporting under the proposed framework.