SEC Proposes Easing Crypto Custody Rules for Investment Advisers

The US Securities and Exchange Commission (SEC) has proposed easing rules for investment advisers to hold clients' crypto assets, potentially clearing a regulatory hurdle that has held some businesses back from offering digital asset investments. The proposal would allow investment advisers to hold clients' crypto themselves when no eligible custodian is available, with conditions.

The SEC chair, Paul Atkins, stated that the crypto market has grown into a multi-trillion-dollar asset class, but their rules and regulations have not kept pace. He noted that this proposal targets a practical barrier to crypto investment: advisers can struggle to find a qualified custodian for a particular token, limiting the investments they can offer clients.

Under the SEC proposal, advisers seeking to hold clients' crypto themselves would need to establish that no permitted custodian is available and reassess this determination quarterly. Self-custody would also require safeguards around private keys, cybersecurity, and separation of each client's holdings. At least two authorized individuals would need to approve any transfer of a self-custodied crypto asset.

The proposal would also allow state trust companies to serve as crypto custodians, with conditions such as making sure the company is authorized by the relevant state authority, has reasonable procedures to safeguard crypto assets from loss, theft or misappropriation, and ensures client holdings are segregated from their own assets.