SEC proposes custody rules for advisers and funds holding crypto

The SEC has proposed rewriting its custody rules so that investment advisers and funds can hold crypto without stepping outside them. The proposal, issued October 1, updates the rules under the Investment Advisers Act and the Investment Company Act.

Two changes stand out. State trust companies would be able to act as custodians, and self-custody would be permitted under set conditions. A summary by the law firm Lowenstein Sandler lists what those conditions involve: private key management, dual approval of transactions, segregated addresses and annual audits.

Custody has been a main obstacle to registered advisers and funds holding crypto directly. The existing rules were written for a world of stocks and bonds held at banks and brokers, and it was unclear how a firm could satisfy them for an asset controlled by a private key. Chairman Paul Atkins said the proposal gives advisers and funds a compliant path that did not exist before.

Admitting state trust companies widens the pool of eligible custodians, which should mean more competition on price and service. The self-custody option is likely to draw the most scrutiny, because it asks the SEC to rely on controls inside the same firm that manages the money. Comments are due 60 days after the proposal is published in the Federal Register.