SEC Proposes Crypto Custody Rule to Modernize Investment Adviser Regulations

The US Securities and Exchange Commission (SEC) has proposed a new rule for crypto custody, aiming to modernize custody rules and expand investor choice. The proposal, which runs 760 pages, targets registered investment advisers, registered investment companies, and business development companies. SEC Chairman Paul Atkins acknowledged that the current rules 'predate the internet' and were built with traditional assets in mind, leaving a 'substantial problem' for crypto custodians.

The proposed rule would allow investment advisers to hold crypto assets themselves under tightly defined conditions, known as conditional self-custody. This would only apply when no qualified custodian exists for a specific asset. The rule also widens the field of eligible custodians, allowing state-chartered trust companies to qualify as custodians for both advisory client and fund crypto holdings.

The proposal has been met with industry reaction, with NovaDius president Nate Geraci pointing to the SEC's fast regulatory pace as a sign lawmakers may regret missing their window to pass the Clarity Act. The public has 60 days to submit comments after Federal Register publication. SEC Chairman Atkins signaled more proposals are coming, suggesting this custody framework is one piece of a larger buildout still underway.