SEC proposes letting advisers and funds hold crypto when no custodian exists

# Summary

The U.S. Securities and Exchange Commission has published a proposal to update custody rules so registered investment advisers and regulated funds can hold clients' crypto directly when no eligible custodian exists. The change targets a practical obstacle: advisers have at times declined token allocations or delayed client exposure because they couldn't find a qualified custodian for specific crypto assets.

# What the proposal changes

# Self-custody conditions

Advisers would need to show a permitted custodian is unavailable for each asset before self-custody. That determination must be reassessed every quarter, and if a custodian becomes available the adviser must transfer the assets as soon as reasonably practicable.

Concrete safeguards required for self-custody include:

• Controls for private keys and cybersecurity protections.

• Procedures that require at least two authorized people to approve any transfer of a self-custodied crypto asset.

The proposal acknowledges adviser custody creates an inherent conflict of interest and states advisers' existing fiduciary duties continue to apply when they hold clients' crypto.

# State trust company option

The SEC would permit state trust companies to serve as crypto custodians subject to conditions:

• Authorization by the relevant state authority to provide crypto custody.

• Audited financial statements and internal control reports.

# Changes to audit, recordkeeping and disclosure

The package includes updates to audit, recordkeeping and disclosure requirements tied to custody arrangements. Those changes are intended to ensure transparency and oversight regardless of whether assets are self-custodied or held with an eligible custodian.

# Why the SEC moved now

The SEC framed the proposal as a practical fix: the crypto market has grown and advisers need workable custody options to offer clients a broader range of token exposures. Industry groups such as the Digital Chamber previously told the SEC that a shortage of qualified custodians had caused advisers to decline or delay token allocations.

# Process and timeline

# What advisers and funds should watch

• How the SEC defines "permitted custodian" and the criteria for demonstrating unavailability.
• Specific technical and operational standards the SEC sets for key control, cybersecurity and segregation.
• How fund boards' oversight responsibilities will be defined when advisers self-custody fund assets.
• How state authorities and state trust companies respond to the new custodial role and the level of state supervision required.

# Bottom line

The proposal aims to remove a practical custody barrier that has limited some advisers' ability to offer certain crypto tokens. It creates a conditional, regulated pathway for adviser and fund self-custody and opens state trust companies as an alternative custodian option, while attaching operational and governance requirements meant to reduce risks to client assets.