SEC Proposes Rules Allowing Advisers to Hold Client Crypto Assets

The Securities and Exchange Commission (SEC) has proposed rules that would allow registered investment advisers and regulated funds to hold client cryptocurrency when no approved custodian is available.

The proposal, published in a 760-page document, aims to address the challenge of finding qualified custodians for crypto assets. Currently, advisers are required to keep client assets with a qualified custodian, such as a bank or registered broker-dealer. However, the SEC notes that 'custodial capabilities may lag an asset's deployment by many months,' particularly in the case of newly developed crypto assets.

The proposed rules would allow advisers to hold client cryptocurrency only after concluding that no permitted custodian is available. They would be required to recheck every quarter and maintain documented expertise for each asset, as well as private key controls requiring at least two people to approve any transaction.

State trust companies could also act as crypto custodians under the proposal, which would increase competition and expand investor protection and investment options. However, Commissioner Hester Peirce noted that the term 'self-custody' is used in a way that does not reflect true self-custody by investors.