SEC Proposes Direct Crypto Holdings for Advisers and Funds

The Securities and Exchange Commission (SEC) has proposed allowing registered investment advisers and regulated funds to hold cryptocurrency assets directly, rather than through a third-party custodian. This change would update longstanding safekeeping requirements for investment advisers and regulated funds under federal securities laws.

The proposal, which was announced on October 1, would permit advisers to retain control over private keys, the digital credentials that authorize transfers, on behalf of their customers. Regulated funds would maintain their holdings through their adviser, subject to compliance requirements and board oversight.

The SEC Chairman, Paul S. Atkins, linked the proposal to custody rules that predate the internet, arguing that custodial services may lag new assets by months. He stated: “Since the advent of Bitcoin in 2008, the crypto asset market has grown from a niche curiosity into a multi-trillion-dollar asset class to which investors actively seek exposure. Unfortunately, our rules and regulations have not kept pace.”

The proposal would require quarterly reassessment for eligibility for direct safekeeping, while security systems would undergo reviews at least annually. Transfers would need authorization by at least two people, and each customer’s holdings would occupy separate blockchain addresses.