SEC Proposes New Crypto Custody Rules to Modernize Investor Protection

The U.S. Securities and Exchange Commission (SEC) has proposed a new cryptocurrency custody framework aimed at addressing the growing need for investor protection in the crypto asset class. The October 1 proposal seeks to modernize custody rules under the Investment Advisers Act and Investment Company Act, allowing qualifying state-chartered trust companies to act as custodians for crypto assets.

SEC Chair Paul Atkins emphasized that the changes are necessary to bridge the gap between existing custody requirements and the evolving realities of crypto markets. The proposal aims to provide a 'clear regulatory framework' and offer advisers and funds a 'compliant pathway' where none previously existed, according to Atkins.

Under the proposed rules, investment advisers or regulated funds could hold crypto assets themselves if they determine that no permitted custodian is available. This determination must be made before self-custody begins and reassessed quarterly. The proposal includes safeguards related to expertise, cybersecurity, annual reviews, internal reporting, account statements, and client disclosures.

The SEC's proposal has drawn mixed reactions. Commissioner Hester Peirce welcomed the broader range of custody options but criticized the use of the term 'self-custody,' suggesting 'shelf-custody' as a more accurate description. Meanwhile, Benjamin Schiffrin of Better Markets argued that the proposal exposes investors to high risks by allowing advisers to maintain custody of clients' crypto assets themselves.