The SEC has proposed a new custody framework that would, for the first time, allow registered investment advisers to hold client crypto assets directly when no qualified custodian is available. The proposal, published October 1, also opens the door for state trust companies to serve as crypto custodians and now heads into a 60-day public comment period.
The package arrives under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. Its core move is simple: the rules most advisers use for securities custody never anticipated assets that live on blockchains. Under current practice, an adviser wanting to recommend bitcoin to a client had to find a qualified custodian willing to hold it, and for much of the industry’s history there were few willing or able to offer that service in a compliant way. That gap shaped how institutional money entered crypto at all.
Chairman Paul Atkins said in a statement that the proposal would give advisers and funds “a compliant pathway where none existed before.” He argued the crypto asset market has grown from a niche curiosity into a multi-trillion-dollar asset class investors actively seek exposure to, while the agency’s custody rules were crafted for a bygone era. Atkins, a longstanding critic of the prior commission’s enforcement-first crypto posture, has made custody one of the agency’s signature regulatory projects this year, and the release reads as the clearest statement yet of his position that clear rules replace lawsuits.
“Today’s proposal would provide a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before,” the commission said in its announcement.
What the proposal actually allows
Self-custody under the rule is conditional, not automatic. An adviser would have to demonstrate that no qualified custodian is reasonably available for the asset in question, and repeat that determination every quarter. The adviser would also need safeguarding expertise for each crypto asset, documented private key management systems, joint authorization of transactions by at least two people, separate on-chain addresses per client, annual cybersecurity reviews and quarterly account statements sent to clients. The commission also wants a written client agreement treating each crypto asset as a financial asset under state law, an additional protection the release calls out directly.
Regulated funds, meaning registered investment companies and business development companies, would get a parallel route. A proposed new rule would let a fund maintain certain crypto assets through its adviser, provided the adviser meets the self-custody conditions and the fund’s board provides oversight. The commission would also rescind an older custody rule and fold business development companies into the framework for the first time, bringing a class of pooled vehicles into formal coverage and aligning the two statutes.
State trust companies that satisfy specified safeguards could qualify as custodians for crypto and related cash holdings. That is a meaningful change in practice: federal law has historically recognized banks and broker-dealers as custodians, while several state-chartered trust companies built crypto custody businesses that sat in a grey zone for years, accepted by some allocators and rejected by others. The proposal would formalize their status under conditions set out in the release, subject to adviser or fund diligence on their controls.
Why custody was the bottleneck
Custody has been the quiet chokepoint of institutional crypto adoption. Without a clean custody path, advisers could not recommend direct crypto holding, funds could not hold it on their own balance sheets, and allocators routed exposure through ETFs or offshore structures instead. The spot bitcoin and ether ETFs approved in earlier years solved the retail problem for passive exposure, but left the advisory problem intact: a wealth manager who wanted to move beyond index-style products had nowhere compliant to put the assets, and the industry standardized around listed funds rather than direct holding.
The proposal also includes modernizations that have nothing to do with crypto. It clarifies when discretionary trading authority triggers custody, including delivery-versus-payment arrangements that the industry has asked about for a decade, updates audit requirements for advisers and codifies several staff no-action positions into actual rules. Several law firm client alerts published this month have pointed out that non-crypto advisers should still read the release, because the adviser-side changes are broad and touch routine counterparty arrangements that many firms assumed were settled.
Market watchers will also note the timing. The proposal lands while spot crypto ETF flows run negative and the broader market trades well below last year’s highs. Regulatory plumbing tends to matter most at exactly these moments: when demand returns, the structures advisers can legally use will determine how quickly capital comes back. The release itself makes no market argument, but the custody question has always been about access, not prices.
The comment window runs 60 days from Federal Register publication. Industry groups are expected to push on two fronts: the feasibility of the self-custody conditions for smaller advisers, who may struggle with the perimeter and key-management requirements, and the treatment of staking and other yield-bearing activity, which the proposal does not squarely resolve. Consumer advocates are likely to argue in the other direction, that self-custody by regulated firms reintroduces exactly the risks the qualified custodian rule was written to prevent after decades of adviser-related fraud.
A final rule is unlikely before next year, and the composition of the commission could shift the outcome in either direction. But the direction of travel is clear: the agency that spent four years treating crypto custody mostly as an enforcement question is now writing it down as a rulebook instead, and the industry is responding with comment letters rather than lawsuits. Whatever emerges from the comment period will define how the next wave of institutional money, if it comes, is allowed to hold the assets it buys.