SEC Unveils New Framework for Crypto Custody by Advisers and Funds

SEC Introduces Custody Framework for Cryptocurrency

The Securities and Exchange Commission (SEC) has proposed a new framework aimed at clarifying custody standards for cryptocurrencies held by registered investment advisers and regulated funds. This initiative seeks to alleviate the regulatory uncertainties that have deterred firms from engaging in digital asset strategies.

The proposed rules would allow self-custody of cryptocurrencies under specific conditions, enable state trust companies to serve as custodians, and revise audit requirements for custodial services provided by broker-dealers. These changes are designed to enhance investor access to cryptocurrency strategies and facilitate compliance for financial professionals.

Investment advisers are currently required to store client assets with "qualified custodians" meeting strict safety criteria. However, the criteria for cryptocurrencies have often been unclear, leading many firms to hesitate in offering digital asset services. The new framework, grounded in the Investment Advisers Act of 1940 and the Investment Company Act of 1940, aims to clarify these standards.

SEC Chairman Paul Atkins highlighted the significant growth of the crypto asset market since Bitcoin's launch in 2008, describing it as a multi-trillion-dollar asset class that attracts investor interest. He acknowledged that existing regulations have not kept pace with this evolution, and the new proposal seeks to address the "grey area of uncertainty" in current custody regulations.

This custody framework is part of a broader regulatory strategy from the SEC, which follows the stalled Clarity Act in the Senate. Other recent initiatives include an "innovation exemption" for trading tokenized stocks on-chain and proposed guidelines for crypto fundraising under Regulation Crypto Assets.

The proposal is in its early stages, with a 60-day public comment period set to begin once it is published in the Federal Register. This will allow for adjustments before any formal vote on adoption takes place.