SEC Tells Advisers: Self-Custody, But Only When No One Else Will Is 📦

The U.S. Securities and Exchange Commission on Thursday proposed a 760-page framework designed to resolve one of the longest-standing obstacles to institutional crypto investing: how registered investment advisers and regulated funds can legally hold digital assets on behalf of clients. Issued under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, the proposal would let advisers self-custody client crypto under defined conditions, permit certain state trust companies to serve as custodians, and update financial-statement audit rules for advisers and broker-dealer custodial services for funds.

Self-custody by advisers would be permitted only when an adviser demonstrates that no eligible qualified custodian is willing to hold a specific asset, a circumstance the SEC acknowledged would probably apply to newly launched tokens that custodians had not yet supported. Advisers exercising that option would be required to have the necessary custody experience and appropriate internal controls, to reassess the availability of qualified custodians quarterly, and to transfer assets to a custodian as soon as reasonably practicable once one became available. Additional safeguards would require private-key protections, cybersecurity controls, segregation of each client's holdings, and approval from at least two authorized individuals for any transfer.

The proposal would also allow state trust companies, financial firms authorized by a U.S. state to hold assets on behalf of others, to serve as crypto custodians for advisers and regulated funds, provided they are authorized by the relevant state authority to provide crypto custody, maintain reasonable procedures to safeguard assets from loss, theft or misappropriation, and produce audited financial statements and internal control reports. Regulated funds would similarly be permitted to maintain crypto assets in self-custody with their investment adviser if the adviser met the self-custody requirements and the fund's board supervised the arrangement.

"Since the advent of Bitcoin in 2008, the crypto asset market has grown from a niche curiosity into a multi-trillion-dollar asset class to which investors actively seek exposure," SEC Chairman Paul Atkins said in a statement, adding that the agency's rules "have not kept pace" and that the proposal would replace "the grey of uncertainty created by custody rules crafted for a bygone era." SEC Commissioner Hester Peirce likened the uncertainty to a regulatory "roller coaster," saying advisers have been "gritting their teeth and holding on for dear life" while awaiting workable custody rules. Commissioner Mark Uyeda said the proposal recognized that adviser custody creates "an inherent conflict of interest," and that advisers' fiduciary duties would continue to apply when they hold clients' crypto. The Digital Chamber had flagged the issue in a May 2025 submission to the SEC, saying some advisers had declined token allocations or asked portfolio companies to retain them until qualified custody became available.

The custody plan is the latest in a series of crypto-related moves by the SEC since the Clarity Act stalled in the Senate, including an "innovation exemption" letting tokenized stocks trade on-chain, a proposed crypto-fundraising framework called Regulation Crypto Assets, and staff guidance stating that token buybacks do not by themselves make a crypto asset a security. The proposal is not final; a 60-day public comment period will open once it is published in the Federal Register, after which the agency can revise the rules before any vote to adopt them.