The U.S. Securities and Exchange Commission (SEC) announced a significant new proposal on Thursday aimed at clarifying how investment advisers and regulated funds can custody crypto assets. This initiative comes at a pivotal moment, coinciding with Commissioner Hester Peirce’s imminent departure from the agency, where she has played a crucial role in shaping its approach to digital assets.
In a move that could reshape the landscape of crypto custody, the SEC’s proposal allows investment advisers to self-custody client crypto assets in limited scenarios, particularly when a qualified custodian is unavailable. This change reflects a growing recognition of the unique challenges faced by firms navigating the evolving digital asset space.
According to SEC Chairman Paul Atkins, existing custody rules were designed for traditional assets and do not adequately address the nuances of digital currencies. “Current regulations leave firms without clear guidance on how to handle crypto assets,” he stated, emphasizing the need for updated standards.
The proposal spans a comprehensive 760 pages, detailing new standards for who can hold crypto on behalf of clients and the necessary record-keeping practices. It also permits state-chartered trust companies to act as custodians, providing advisers and funds with more options beyond the traditional federal custodians.
What the Rule Would Allow
Under the new proposal, self-custody would be permitted for advisers in specific situations, such as when no qualified custodian is able or willing to hold a particular asset. SEC officials anticipate that these instances will be rare, with one example cited being a newly launched token that has not yet been supported by custodians.
Those firms opting for self-custody will be required to demonstrate a certain level of expertise to manage the assets securely. They must also conduct quarterly reviews to determine if a qualified custodian has since become available.
Commissioner Hester Peirce clarified that the term “self-custody” pertains to advisers holding assets on behalf of clients, rather than individual investors managing their own crypto. “While true self-custody may not be suitable for everyone, many crypto owners value the ability to control their own assets,” Peirce remarked.
Timing and What Comes Next
The timing of this proposal is notable, arriving just a day before Peirce’s departure from the SEC. Having led the agency’s Crypto Task Force since its inception, she will transition to a teaching role in Virginia. Her exit leaves the SEC with only two commissioners, following a recent decision to lower the quorum requirement from three to two.
The public comment period for the custody proposal will remain open for 60 days, after which the SEC will determine whether to finalize the rule. This proposal follows other recent SEC initiatives aimed at establishing a clearer framework for crypto policy, including the Innovation Exemption for tokenizing securities and a proposal titled Regulation Crypto Asset for digital fundraising.
Both the SEC and the Commodity Futures Trading Commission (CFTC) have been actively pursuing crypto regulations following the Senate’s failure to pass the Clarity Act. Recently, the CFTC has also submitted its own crypto rulemaking plans to the White House.
Atkins indicated that more proposals are on the horizon, reiterating the SEC’s commitment to establishing the United States as a hub for crypto activity. With this latest custody proposal, the SEC has effectively addressed every major item on the crypto agenda that Atkins outlined earlier this year.
