SEC Proposes Crypto Custody Rules, Issues FAQs on Asset Classification

The Securities and Exchange Commission (SEC) has released proposed rules for the custody of crypto assets held by investment advisers and funds. Under the proposed rules, investment advisers and funds would be allowed to self-custody crypto assets, provided they can demonstrate that no permitted custodian is available to hold the assets. To ensure the security of client assets, advisers would need to implement safeguarding systems, including private key management, transaction approval by at least two persons, and segregation of each client's crypto assets at separate addresses.

The proposed rules also require advisers to implement cybersecurity controls, maintain an annual internal control report from an independent accountant, and conduct a documented annual review. Quarterly account statements or their equivalent would also be required. Additionally, the proposed rules include state trust companies to the list of qualified custodians permitted to hold client crypto assets.

The SEC's Division of Corporation Finance staff has also issued frequently asked questions (FAQs) on the SEC's March 17 Interpretive Release on crypto asset classification. The FAQs clarify the distinction between digital commodities and digital tools, and provide guidance on the classification of staking receipt tokens.