SEC Proposes New Custody Rules for Investment Advisers and Funds to Hold Crypto Assets

The Securities and Exchange Commission (SEC) has proposed new custody rules for investment advisers and funds to hold their own crypto assets. The proposal, which is open for public comment, would allow self-custody in specified circumstances and permit state-chartered trust companies to act as custodians for client and fund crypto assets.

According to the SEC, the framework would apply to registered investment advisers and regulated funds, including registered investment companies and business development companies. The proposal aims to provide more flexibility for advisers and funds to manage their crypto assets while maintaining oversight and safeguards.

The key challenge in ensuring custody is verifying that a fund exclusively controls the address holding the assets. An auditor can inspect an address containing 10,000 units of a token, but this does not prove the fund's exclusive control or ownership. A signed challenge, where the custodian signs a unique message from the address without moving the coins, provides evidence of signing ability but not exclusive control.

The SEC proposes changes to adviser audits and broker-dealer custodial services for regulated funds. The proposal also addresses the distinction between key control and asset availability, recognizing that a wallet might require hardware devices, multiple approvals, and recovery processes. An auditor needs to inspect governance, access logs, backup policy, change controls, and incident exercises, not just a balance screenshot.