SEC proposes new crypto custody routes for advisers and funds

The U.S. Securities and Exchange Commission proposed new rules on Oct. 1 that would let registered investment advisers and regulated funds use more ways to hold crypto assets, including conditional self-custody. The SEC announcement says the proposal would also allow state trust companies to act as custodians and update requirements under the Investment Advisers Act and Investment Company Act. These are proposed changes; the SEC has not adopted them as final rules.

When could an adviser hold crypto itself?

Under the proposal, the adviser would first need to determine that no permitted custodian is available for the particular crypto asset. It would make that determination before taking custody and repeat it quarterly. If no custodian is available, the adviser could hold the asset for a client, including a regulated fund, only if it meets the proposed safeguards.

The SEC’s proposal fact sheet says the adviser must have and document expertise in safeguarding each asset, establish systems to protect it, and review those systems at least annually. Those systems must address private-key management and require at least two people to authorize each transaction. The adviser would also keep each client’s crypto in network addresses containing only that client’s assets, mitigate cybersecurity risks, and send account statements at least quarterly.

Independent checks are part of the proposed route: within six months of taking custody, and annually after that, the adviser would obtain an internal-control report from an independent public accountant. For a regulated fund, its board would oversee the arrangement, including reviewing the adviser’s explanation for why a permitted custodian is unavailable.

What role could state trust companies play?

A state trust company could hold client or fund crypto if the adviser or fund checks its authority and safeguards. Before hiring one, and annually thereafter, the adviser or fund would need a reasonable basis, after due inquiry, to believe the relevant state banking authority permits it to provide crypto custody. It would also review the company’s latest audited financial statements and internal-control report, and assess its written policies for protecting crypto assets and related cash. The assets would have to remain separate from the trust company’s own property.

This option addresses a problem the SEC identifies in the fact sheet: permitted custodians may not be readily available for some crypto assets, and custodians that do offer crypto services may not support newer or less common assets. The proposal would make state trust companies a defined custody route, subject to those checks, rather than requiring firms to assess whether each one meets the existing rules’ definition of a bank.

What happens next?

The SEC also proposed modernizing other adviser and fund custody requirements and updating related recordkeeping and disclosure rules. The comment period will remain open for 60 days after the proposing release is published in the Federal Register; the clock does not begin simply on the Oct. 1 announcement date. The change for now is a proposed framework that adds conditional self-custody and state trust companies to the available paths. The next point to watch is the Federal Register publication and the comments that follow.

References

• SEC announcement — sec.gov
• proposal fact sheet — sec.gov