The SEC’s new crypto custody proposal would let advisers hold client assets themselves under conditions, addressing a gap that can prevent funds from investing before custodians are ready.
Announced on October 1, the framework covers registered investment advisers and regulated funds, including registered investment companies and business development companies. It would also establish conditions for using state trust companies to safeguard crypto assets.
For clients, these changes could widen the investments available through a manager. They would also make the manager’s custody arrangements important to understand, particularly when the firm selecting an investment holds the assets itself.
A token can arrive before a custodian
Crypto custody involves safeguarding the credentials that authorize transactions and controlling who can use them. For an investment firm, deciding to buy an asset is only part of the job. It also needs a lawful arrangement for protecting the client’s holdings.
That can become an obstacle when an asset reaches the market before a permitted custodian supports it. SEC Chairman Paul Atkins said in his October 1 statement that “custodial capabilities may lag an asset’s deployment by many months.”
The proposed self-custody route addresses that interval. An adviser could hold an eligible client asset while no qualified custodian is available, provided it can satisfy the proposed safeguards.
Two custody routes, with different responsibilities
Atkins described the proposal as offering “a compliant pathway where none existed before.” Its two additions would accommodate qualifying outside providers and allow an adviser to take custody in specified circumstances.
The adviser amendments cover crypto assets that are funds or securities, while the regulated-fund provisions cover securities or similar investments.
The state trust company route would require due diligence, review of audited financial statements and control reports, and separation of client assets from the provider’s own holdings.
Under self-custody, the adviser would hold the private-key material needed to access client assets. The client would still be relying on a firm to safeguard the investment. For regulated funds, the arrangement would operate through the fund’s adviser with board oversight.
Self-custody would require an ongoing search for alternatives
The full proposing release makes custodian availability a continuing condition. An adviser would have to document its determination initially and at least quarterly. If a qualified custodian became available, it would have to move the assets as soon as reasonably practicable.
Meanwhile, transfers would require joint authorization by at least two designated people. Separate client addresses, cybersecurity measures, reviews and reports on safeguarding controls would provide further checks on the adviser’s handling of the assets.
Those checks matter because the firm would be combining investment decisions with custody. Commissioner Mark Uyeda acknowledged in his accompanying statement that “self-custody creates an inherent conflict of interest,” while emphasizing that an adviser’s fiduciary duty would continue to apply.
What a client would need to understand
Consider a hypothetical adviser seeking to add a newly issued crypto security to a client’s portfolio. If no qualified custodian would maintain it, the proposed framework could allow the adviser to hold it directly after meeting the conditions. The client’s exposure would depend on both the investment and the firm’s ability to safeguard access to it.
Before accepting such an arrangement, the client would have several practical questions:
- Transfer authority: Who can approve transactions, and who provides the second authorization?
- Verification: What statements and control reports allow the client to check holdings and the custody arrangements?
- Future custody: How would the adviser transfer the assets when an outside qualified custodian becomes available?
These questions address risks that a price chart cannot show. A token could rise in value while poor key management puts access to it at risk. Equally, effective custody would not prevent losses if its market price fell.
The proposal now goes through public consultation
The custody framework advances the SEC’s broader work on crypto offerings, tokenization and trading. Our earlier coverage of the SEC and CFTC proceeding under existing authority identified custody as an initiative still awaiting a complete proposal. The October 1 release now sets out the proposed operating conditions.
It remains a proposal. The public-comment period runs for 60 days after publication in the Federal Register, and the Commission would need to adopt final rules before these new routes take effect.
The consultation gives advisers, custodians and investors an opportunity to examine whether the controls are practical to implement. Their responses can also test whether client statements and reviews would provide enough information to scrutinize a firm that both manages an investment and safeguards it.
This article is for informational purposes only and does not constitute legal or investment advice. The SEC proposal may change during rulemaking.
Kosta has reported on cryptocurrency markets and blockchain infrastructure since 2020, bringing over six years of hands-on experience in the crypto industry built through daily tracking of markets, trends, and emerging blockchain developments. Specializing in Bitcoin on-chain analysis, institutional ETF flows, and digital asset price action, his work at Coindoo has been cited by other news agencies and consistently covers market developments with a focus on data-driven reporting across Bitcoin, Ethereum, Solana, and XRP.
Over the years, Kosta has contributed to multiple crypto media outlets in different regions, authoring over 6,000 articles across the sector. His reporting spans cryptocurrency markets and the broader fintech industry, tracking not only price action but also the technological and regulatory forces shaping the ecosystem.
To support his analysis, Kosta actively leverages on-chain data and metrics from leading platforms such as Santiment, Glassnode, and CryptoQuant, enabling deeper, evidence-based market insights. He believes in the power of transparency and the data that underpins the blockchain ecosystem.
His academic background in Marketing Management from Denmark further complements his analytical approach, adding a strong understanding of communication strategy and content positioning to his work.
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