SEC proposes conditional crypto self-custody for advisers and funds

The U.S. Securities and Exchange Commission proposed rules on Oct. 1 that could let registered investment advisers and regulated funds hold some crypto assets themselves, with safeguards around access, reporting and oversight. The SEC said the proposal is intended to give firms a compliant route to custody assets for which a permitted custodian is unavailable. Its announcement of the proposal says the rules would also let state trust companies serve as custodians.

What would self-custody mean under the proposal?

It would mean an adviser holds a client’s crypto asset by possessing some or all of the private keys needed to access and transact with it, rather than keeping it at a permitted custodian. The proposal covers client crypto funds and securities held by registered advisers. For regulated funds, it covers crypto securities and similar investments; it would let a fund hold assets through its adviser if the adviser follows the proposed safeguards and the fund’s board oversees the arrangement.

The first step would be a written check: the adviser must determine that a permitted custodian is unavailable, then repeat and document that determination at least quarterly. The adviser would also need expertise in safeguarding each asset and systems to manage its keys and protect it from loss, theft or misuse. Think of the keys as the controls that authorize a withdrawal: the proposal would require at least two people to authorize each transaction.

What checks would apply to advisers and funds?

Each client’s assets would have to sit in one or more network addresses used only for that client’s assets. Advisers would need to address cybersecurity risks and review their controls at least annually. They would also have to obtain an internal control report within six months of starting self-custody, then annually.

At least quarterly, clients would receive a statement identifying the network address, the balance at period end and transactions during the period, so they could compare the report with the on-chain record. For a regulated fund, the board would assess whether the adviser can safeguard the asset before custody begins and annually after that. It would also review the adviser’s custodian-unavailability determination before custody begins and quarterly thereafter. The SEC describes these conditions in its proposed custody rule.

When could the rules take effect?

They are proposed rules, not a change already in force. The SEC is seeking public comment for 60 days after publication of the proposing release in the Federal Register. The proposal applies only within the federal custody rules’ stated scope: for advisers, crypto assets that are funds or securities; for regulated funds, securities or similar investments. Its next step depends on the comment process and any final SEC action.

Sources and documents

• announcement of the proposal — sec.gov
• proposed custody rule — sec.gov