SEC Proposes Framework for Crypto Custody by Advisers and Funds

The U.S. Securities and Exchange Commission (SEC) has proposed a new framework to govern the custody of crypto assets by investment advisers and regulated funds. The proposal, announced on October 2, aims to provide a 'compliance pathway' for holding digital assets under a set of rules largely established before the internet era. SEC Chairman Paul Atkins stated, 'Since the birth of Bitcoin in 2008, the crypto asset market has evolved from a niche novelty into an asset class worth trillions of dollars, with investors actively seeking exposure.' However, the rules and regulations have failed to keep pace with this development, he noted.

The proposal addresses a key issue facing institutional investors, namely the current lack of qualified custody infrastructure for certain crypto assets. It also permits self-custody of crypto assets under specific circumstances and allows state-chartered trust companies to provide custody services for clients' and regulated funds' crypto assets. This is significant for institutional entities such as asset managers and hedge funds that wish to hold Bitcoin and other crypto assets directly, rather than gaining exposure through ETFs or other intermediaries.

Additionally, the proposal permits investment advisers to engage in 'self-custody' of clients' and regulated funds' crypto assets under limited conditions. However, SEC Commissioner Hester Peirce clarified that this 'self-custody' refers to the investment adviser acting as the custodian of client assets, not investors directly controlling their own crypto assets.