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SEC's proposed framework for crypto custody

The SEC has released a new rule proposal aimed at clarifying the rules under which investment advisers and regulated funds would handle crypto custody. The draft, announced on Thursday, seeks to create a consistent framework for holding client digital assets, recording them and bringing them under federal reporting requirements.

Under the 760-page proposal, the agency would define more clearly which types of firms may custody crypto assets. The SEC, led by Paul Atkins, also argues that existing custody rules were designed for traditional assets and therefore create uncertainty in the digital asset market.

What areas would the proposal regulate?

  • A framework defining the types of institutions that may properly hold crypto assets
  • Record-keeping and federal reporting obligations for investment advisers and funds
  • Additional clarity on industry practices and supervisory requirements

When would self-custody be allowed?

The draft also opens the door, under certain conditions, for investment advisers to hold client assets through self-custody. However, this use is defined according to asset-management industry practice rather than the broader meaning commonly used in the crypto sector; the adviser would need expertise in this area and would have to be unable to find another suitable custodian.

According to SEC officials, the proposal also includes additional rules on security and internal controls. Advisers would be required to reassess their custody arrangements every three months, and the framework could also matter for newly issued tokens that a custodian does not yet support. The draft would also allow state-chartered trusts to serve as custodians.

How would the process work?

The rule proposal will enter a 60-day public comment period. After that stage, it will become clear whether the SEC will revise the text based on feedback.

Where this fits in the SEC's broader crypto agenda

The move comes as the agency brings another major item on its crypto agenda formally onto the table. The decision was announced one day before Hester Peirce, who has led the SEC's Crypto Task Force since its creation, left the agency on Friday; she is set to take up a professorship in Virginia.

This week, the SEC also said it would change its quorum rule, counting two commissioners as enough instead of requiring at least three, and noted that if one commissioner recuses themselves from a specific matter, the remaining member could still constitute a quorum. With this custody initiative, the agency has now taken steps on all of the major digital asset priorities it had previously announced, following its Innovation Exemption and Regulation Crypto Asset efforts.

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