Advisers May Self-Custody—With Strings Attached
The U.S. Securities and Exchange Commission (SEC) has introduced a proposal that could significantly alter how registered investment advisers and regulated funds manage their clients’ crypto assets. Under the new framework, advisers would be permitted to hold digital assets themselves—but only when no eligible crypto custodian exists for a particular asset. This marks a shift from the SEC’s previous stance, which generally required third-party custodianship for client holdings.
To qualify for self-custody, advisers must not only document the absence of a permitted custodian for each asset but also reassess this status every quarter. If an eligible custodian becomes available at any point, advisers are obligated to transfer the assets “as soon as reasonably practicable,” according to the SEC’s published proposal.
The proposal, published on a Thursday and subject to a 60-day comment period, would require at least two authorized individuals to approve any crypto transfer.
No Eligible Custodian? Safeguards Now Required
The SEC’s proposal does not leave self-custody unchecked. Advisers who take on this responsibility must implement strict controls around private key management, robust cybersecurity protocols, and clear separation of client holdings from their own assets. Crucially, any transfer of client crypto would require approval from at least two authorized individuals, adding an extra layer of oversight to prevent fraud or error.
These requirements reflect persistent concerns about hacks and operational mishaps in the digital asset sector.
The new rules also acknowledge blockchain technology’s role in compliance: records maintained on a blockchain could count toward regulatory recordkeeping obligations, provided certain conditions are met. This nod to distributed ledger technology contrasts with earlier SEC frameworks that often overlooked such innovations.
State Trust Companies Join Custody Ranks
Another notable change is the recognition of state trust companies as eligible crypto custodians. Previously, only federally regulated banks or similar entities were considered acceptable by the SEC. Now, state-chartered trust companies could serve as custodians for both client and fund crypto assets if they meet specific criteria.
This expansion comes at a time when several large state trust companies have ramped up their digital asset operations. For example, in 2023 alone, at least four state trust firms announced new crypto custody services targeting institutional clients—a trend that may accelerate if the SEC’s proposal is adopted.
Quarterly Reviews for Custody Gaps
Under the proposed rules, investment advisers would need to conduct quarterly reviews to determine whether an eligible custodian has become available for each crypto asset they hold on behalf of clients or funds. This ongoing obligation aims to ensure that self-custody is used only as a last resort and not as a default practice.
The quarterly review requirement creates a tension: while it provides flexibility for advisers navigating an evolving custody landscape, it also introduces fresh compliance burdens and potential operational headaches every three months.
Why It Matters: Practical Impact on Advisers and Funds
The practical implications are immediate. As reported by cointelegraph.com, some investment advisers have already declined token allocations or asked portfolio companies to retain them until compliant custody solutions emerge—a trend documented in a May 2025 submission to the SEC by the Digital Chamber. The proposed rules could open doors for those advisers previously sidelined by lack of custody options.
However, lawmakers’ recent procedural block of the Clarity Act—intended to distinguish between digital securities and commodities—means regulatory uncertainty persists even as these custody rules evolve.
The SEC’s move arrives amid broader efforts to modernize its approach to digital assets. Chairman Paul S. Atkins noted that agency rules “have not kept pace” with crypto’s transformation from a niche market in 2008 to today’s multi-trillion-dollar sector. The public now has 60 days from publication in the Federal Register to comment on the proposal before any final vote is held—a window likely closing in late summer 2024 if standard timelines apply.
The Quick Take
- •The SEC proposal allows advisers to self-custody crypto only if no eligible custodian exists, with quarterly reassessment required.
- •At least two authorized individuals must approve any crypto transfer under the proposed rules published on a Thursday.
- •State trust companies would be permitted to serve as crypto custodians for advisers and funds, subject to conditions.
What remains unresolved
It remains unclear how the SEC will revise its proposed crypto custody rules following the 60-day public comment period, after which any adoption vote would determine whether investment advisers and funds can self-custody crypto assets or use state trust companies as custodians; if the SEC adopts the rules as proposed, advisers could immediately begin holding client crypto themselves under the outlined safeguards when no eligible custodian is available.
