Investment Advisers See Clear Skies Ahead for Crypto Asset Custody
SEC Supports State Trust Companies as Crypto Asset Custodians
SEC Clarifies Position on Crypto Asset Custody
The U.S. Securities and Exchange Commission’s (SEC) Division of Investment Management has taken a significant step in clarifying the custody of crypto assets. In a recent no-action letter, the SEC confirmed that federally registered investment advisers can utilize State Trust Companies to hold clients’ crypto assets. Commissioner Hester Pierce highlighted the benefits of this clarification, emphasizing that eliminating regulatory uncertainty would protect investors and encourage innovation.
Understanding Custody Rules for Crypto Assets
The SEC’s custody rules require investment advisers to maintain client funds and securities with a “qualified custodian.” This poses challenges in the context of digital assets due to complexities such as controlling cryptographic keys and addressing new insolvency and cybersecurity issues. The limited number of firms able to meet these requirements has been a hurdle for the growing demand in crypto asset management.
Past SEC Actions on Crypto Custody
In 2019, a joint statement by the SEC and FINRA detailed the challenges of applying existing rules to crypto assets, inadvertently discouraging broker-dealers from crypto custody. Recent developments have shifted this stance. In January 2025, the SEC updated its staff accounting bulletin, removing some burdensome requirements related to balance sheet liabilities. In May 2025, the withdrawal of a former joint statement further relieved constraints on potential custodians.
The Impact of the No-Action Letter
With its latest no-action letter, the SEC extends certain concessions to State Trust Companies, allowing them to hold crypto assets as “qualified custodians” under specific conditions. These companies must:
- Verify their authorization and cybersecurity measures.
- Provide audited financial and control reports to ensure operational effectiveness.
- Enter into clear, written custodial agreements that protect clients’ holdings.
- Disclose any risks to their clients or fund boards.
- Act in the best interest of clients and fund shareholders.
Practical Implications for Advisers
While this no-action letter is a progressive step, advisers in state-registered capacities should still exercise caution. Not all State Trust Companies may meet the federal or state definitions of a “qualified custodian.” Legal counsel should be consulted to understand the implications of the SEC’s position and how state definitions align with federal regulations.
Ensuring Compliance in Crypto Asset Management
Investment advisers must continue to perform due diligence and document sound practices when engaging in crypto asset management. Assessing risks and balancing regulatory guidance with practical necessities is vital for safeguarded growth within the evolving landscape of digital finance. As always, comprehensive legal guidance remains essential in navigating these complex regulatory waters.
