SEC proposes conditional crypto self-custody rules for advisers

The SEC proposed new crypto custody rules on Oct. 1 that would let registered investment advisers hold clients’ crypto when no qualified custodian is available, subject to safeguards. The agency said the framework could give advisers and regulated funds a way to custody crypto assets under federal securities laws. In its announcement, the SEC said the proposal would also allow state trust companies to act as custodians.

When could advisers hold crypto themselves?

An adviser would have to determine in writing that a qualified custodian was unavailable for the asset, then reassess that determination at least quarterly, according to the proposed rule. The SEC defines self-custody here as an adviser possessing any portion of the private key materials for a client’s crypto asset; the term does not mean the client holds the asset directly.

What safeguards would the proposal require?

Advisers would need expertise in safeguarding each asset and systems covering private-key management, cybersecurity and protection against loss, theft, misuse and misappropriation. The proposal also requires at least two people to authorize transactions and separate blockchain addresses for each client’s assets.

Advisers would review their safeguards and cybersecurity controls annually, obtain an annual internal control report from an independent public accountant and provide clients with account statements at least quarterly. For a regulated fund to hold crypto through its adviser, the fund’s board would also oversee the custody arrangement.

When can the public weigh in?

The proposal is open for public comment for 60 days after publication in the Federal Register, the SEC said. The agency has not specified a calendar deadline on its proposal page, which lists the deadline as 60 days after publication. The rules remain proposals pending SEC action.

Sources and documents

• announcement — sec.gov
• proposed rule — sec.gov