SEC Proposes Crypto Custody Rules for Investment Advisers, Opening Door to Self-Custody and State Trust Companies

The Securities and Exchange Commission proposed a rule Wednesday that would fundamentally alter how registered investment advisers and regulated funds hold digital assets, introducing the first tailored custody framework designed specifically for cryptocurrency rather than traditional securities.

Under the proposal, issued pursuant to the Investment Advisers Act of 1940 and the Investment Company Act of 1940, firms managing client capital could rely on state-chartered trust companies as qualified custodians for crypto holdings. The plan also carves out conditions under which advisers themselves may hold digital assets in self-custody, a practice historically prohibited for traditional securities due to the risks of commingling or misappropriation.

For years, the SEC’s existing custody rule — Rule 206(4)-2 — has acted as a de facto blockade against institutional crypto adoption. That regulation requires advisers to maintain client funds with a “qualified custodian,” typically a bank, registered broker-dealer, or futures commission merchant. Because most specialized crypto custodians operate under state trust charters rather than federal banking licenses, advisers faced persistent legal uncertainty about whether those entities satisfied the standard. Many firms avoided offering digital-asset strategies entirely rather than risk enforcement action.

State trust companies have long served as the backbone of U.S. crypto custody infrastructure. Firms such as Anchorage Digital, which secured the first federally chartered digital asset bank status through the Office of the Comptroller of the Currency in 2021, alongside numerous state-regulated entities in jurisdictions like South Dakota, Wyoming, and New York, currently safeguard billions of dollars in institutional crypto. Yet their patchwork regulatory status left federally registered advisers without a uniform compliance path. The SEC’s move to explicitly recognize these entities as qualified custodians resolves a structural mismatch between federal advisory law and the decentralized nature of blockchain-based asset storage.

Allowing self-custody under defined conditions represents an even sharper departure from traditional market structure. Unlike equities or bonds, which require centralized clearinghouses and transfer agents, certain cryptographic assets can be secured directly by the entity controlling the private keys. The proposed framework acknowledges this technical reality, though it will likely impose strict requirements around key management, segregation protocols, and disaster recovery to prevent the types of catastrophic losses seen during the 2022 collapse of FTX, where unregulated internal custody practices erased billions in client value.

SEC Chairman Paul Atkins framed the initiative as a necessary modernization, stating that the agency’s rules “have not kept pace” with a multi-trillion-dollar asset class and that the proposal replaces “the grey of uncertainty created by custody rules crafted for a bygone era.” Since Bitcoin’s emergence in 2008, the gap between legacy financial regulations and digital asset mechanics has forced the industry to operate in legal ambiguity.

Beyond expanding who can hold assets, the proposal updates financial-statement audit requirements for advisers dealing in crypto and revises broker-dealer custodial service rules applicable to regulated funds. These technical adjustments aim to align reporting obligations with the continuous, 24/7 settlement nature of blockchain networks, which do not conform to the traditional end-of-day reconciliation models built into decades-old audit standards.

The custody framework arrives amid a broader sequence of regulatory actions at the SEC following the legislative stalling of the Clarity Act in the Senate. Rather than waiting for Congress to pass comprehensive market-structure legislation, the commission has pursued an agency-driven strategy. Recent moves include an “innovation exemption” allowing tokenized equities to trade on-chain, the introduction of Regulation Crypto Assets to govern digital-asset fundraising, and staff guidance clarifying that token buyback programs do not automatically classify a digital asset as a security under the Howey test.

This shift signals that the SEC is attempting to build a functional regulatory architecture using its existing statutory authority, moving away from the enforcement-heavy posture that characterized previous leadership. By addressing custody — arguably the most critical operational bottleneck for institutional capital deployment — the agency is targeting the specific friction point preventing pension funds, endowments, and traditional wealth managers from scaling their crypto allocations beyond spot exchange-traded products.

A 60-day public comment period will commence upon the proposal’s publication in the Federal Register. Following that window, the commission will review industry feedback and potentially revise the text before scheduling a final vote among the five commissioners.