SEC Proposes Self-Custody Rules for Crypto Assets

The Securities and Exchange Commission (SEC) has proposed changes to how crypto assets can be custodied, allowing Registered Investment Advisors (RIAs) to self-custody client assets under certain conditions. This move comes after Congress's failure to pass digital asset legislation last month.

According to the SEC, typical custodians may not be willing or able to hold certain crypto assets, and even those that offer the service may not support 'the large and continuously growing number of crypto assets in the market.'

The proposed changes would allow RIAs to self-custody client assets if they determine that a permitted custodian is not available, and must check whether this remains the case quarterly. Advisors must have expertise on safeguarding each crypto asset, review cybersecurity systems no less frequently than annually, and address private key management and joint authorization of any crypto asset transactions by at least two people.

The proposal has garnered mixed reactions, with some arguing it provides a positive framework for crypto custody, while others claim it subjects investors to high risk. The SEC dropped several prominent enforcement actions against crypto-related firms under Chair Paul Atkins' leadership, which is seen as a more crypto-friendly approach compared to the previous administration.