Last summer, two friends goaded me into riding a roller coaster for the first time in decades. The terrifying sense of dread that gripped me as we whipped around the curves and dropped down irrationally steep hills on a ride that was totally out of my control made me think, of course, of investment advisers’ wild ride with crypto custody over the years.
Without clear rules about how and where crypto assets could be custodied and often without viable qualified custodians available,[1] investment advisers have been gritting their teeth and holding on for dear life hoping the regulatory roller coaster will soon end in workable custody rules. The Commission’s 2023 custody proposal, rather than offering some respite from the ride, threw these advisers for another loop: compliant crypto custody looked impossible under the proposal, and the accompanying release suggested that many advisers were already on the wrong side of the law.[2] The Commission today approved a proposal to amend the custody rules for registered investment advisers and regulated funds, which I hope foreshadows that a calm end to the regulatory roller coaster ride is imminent.
Though the proposal covers a range of crypto and non-crypto topics, a major focus is the custody of crypto assets.[3] The proposal would expand authorized custody options beyond current “qualified custodians,” who may not be available or may not have the technological expertise to safeguard certain crypto assets of advisory clients and regulated funds.
The proposed rules include a significant new custody option: under limited circumstances and subject to specified conditions, advisers may “self-custody” client and regulated fund crypto assets. A threshold condition is the adviser’s determination, prior to taking “self-custody” and on a quarterly basis after that initial determination, that no permitted custodian is available to maintain a crypto asset.
My use of quotes around the term “self-custody” is intentional. The proposal uses the term in a way that does not reflect true self-custody by investors. Rather, it focuses on advisers acting as custodians for their clients’ assets and deems that situation to be “self-custody.” I would have preferred the term “shelf-custody” to distinguish adviser custody from situations in which investors custody their own assets without intermediation. True self custody is not the right choice for everyone, but many crypto owners prize being able to custody their own assets. Regulators should zealously protect investors’ right to self-custody and not attempt to force investors to custody their assets with someone else. But I digress. . . .
Another significant custody option in the proposal is state trust companies. Prior to engaging a state trust company as a permitted custodian, and annually thereafter, the adviser or regulated fund must have a reasonable basis, after due inquiry, for believing that the state trust company is authorized by the relevant state banking authority to provide crypto asset custody, and that it has written policies and procedures reasonably designed to safeguard crypto assets and related cash from the risk of theft, loss, misuse, and misappropriation. Allowing eligible state trust companies to serve as permitted crypto custodians would increase competition and expand investor protection and investment options.
I encourage market participants to invest the time to read the lengthy proposing release and respond to its many requests for comment to inform the Commission’s final rulemaking. Public comments will help us get advisers off the regulatory roller coaster and allow them to choose custody options that best serve their customers. Thank you to Brian Daly and the rest of the staff in the Division of Investment Management, as well as staff in the Division of Economic and Risk Analysis, Division of Trading and Markets, and Office of General Counsel, for their diligent work on this important proposal.
[1] As the proposing release notes, “While the current custody rules rely on permitted custodians to provide custodial services, in practice, few such traditional custodians have offered robust custodial services for a substantial range of crypto assets in part due to prior Commission action and staff statements, as well as other applicable regulatory guidance.” SeeAdviser and Regulated Fund Custody Rules; Crypto Custody Rules, Investment Advisers Act Rel. No. 7023 (Oct. 1, 2026) (“Proposing Release”) at text accompanying n.38, https://www.sec.gov/files/rules/proposed/2026/ia-7023.pdf.
[2] See, e.g., Proposed Rule, Safeguarding Advisory Client Assets, at p. 68, https://www.sec.gov/files/rules/proposed/2023/ia-6240.pdf (“Because we understand that most crypto assets, including crypto asset securities, trade on platforms that are not qualified custodians, this practice would generally result in an adviser with custody of a crypto asset security being in violation of the current custody rule because custody of the crypto asset security would not be maintained by a qualified custodian from the time the crypto asset security was moved to the trading platform through the settlement of the trade.”) (footnote omitted).
[3] Crypto assets are not all subject to custody requirements. As stated in the Proposing Release, “Although a crypto asset may or may not meet the definition of a ‘security’ under the Federal securities laws, the proposed Advisers Act custody rule amendments would only apply with respect to crypto assets that are funds or securities (or, with respect to the account of a regulated fund, a security or similar investment), and the proposed Investment Company Act custody rules would only apply with respect to crypto assets that are securities or similar investments.” See Proposing Release at text accompanying n.61. See also proposed rule 223-1(a).