SEC proposes conditional crypto custody path for advisers and funds

The US Securities and Exchange Commission proposed new crypto custody rules on Oct. 1, opening conditional self-custody and state trust company options for registered investment advisers and regulated funds. The SEC says the changes could widen access to crypto investment strategies. Its announcement of the proposal says the rules would update requirements under two federal investment laws.

The proposal responds to a gap between crypto custody needs and the firms allowed to hold assets for clients. Bloomberg Law reported that the SEC cited a shortage of available custodians for new crypto securities. The proposal is not a final rule, and its requirements could change after public comment.

When could an adviser hold crypto itself?

An adviser could self-custody a client’s crypto only if it determines that a qualified custodian is unavailable. Under the proposal, it would have to make and record that determination before starting, then review it at least every three months. The adviser would also need expertise in safeguarding each asset and systems to protect it from loss or theft.

Those systems would need joint approval from at least two people for transactions and separate blockchain addresses for each client’s crypto. Advisers would also face cybersecurity requirements, an annual review of their safeguards and an independent accountant’s annual report on internal controls. They would have to provide clients with account statements at least every quarter.

What role could state trust companies play?

The proposal would let state trust companies act as custodians for crypto and related cash, subject to conditions. Before hiring one and each year afterward, an adviser or fund would need a reasonable basis to believe the company is authorized by its state to provide crypto custody. It would also need to review the company’s audited financial statements and check that its written policies cover private key security and cybersecurity.

These conditions would give advisers another option for separating investment decisions from the safekeeping of client assets. The proposal still holds advisers responsible for their duties to clients when they choose and monitor a custodian.

Which assets are covered, and what happens next?

The proposal amends rules under the Investment Advisers Act and adds rules under the Investment Company Act. Its scope is tied to client funds and securities, and to securities and similar investments held by regulated funds; it does not establish a custody rule for every crypto asset.

The SEC says comments will be due 60 days after the proposal appears in the Federal Register. Until the agency reviews comments and adopts a final rule, the new custody options remain proposals.

References

• announcement of the proposal — sec.gov
• reported that the SEC cited a shortage of available custodians for new crypto securities — news.bloomberglaw.com