The SEC’s crypto custody proposal for advisers and funds: what it permits and what it leaves out
Summary
On 1 October 2026, the US Securities and Exchange Commission (SEC) proposed rules on how registered investment advisers and regulated funds (registered investment companies and business development companies) may hold crypto assets (Release Nos. IA-7023 and IC-36353; File No. S7-2026-35). The proposal would write two custody options into the rules: state trust companies, which are currently addressed in a September 2025 staff no-action letter, and adviser “self-custody” in limited circumstances.
The proposal does not add trading platforms that are not permitted custodians to the list of permitted custodians. Crypto assets within the scope of the rules would continue to be held by a permitted custodian or, under the new conditions, by the adviser itself.
What was proposed
The proposal amends the custody rule under the Investment Advisers Act of 1940, redesignating it as rule 223-1, and adds new custody rules under the Investment Company Act of 1940. Chairman Atkins and Commissioners Peirce and Uyeda issued statements on the proposal. No dissenting statement was published. In a separate statement the same day, Chairman Atkins and Commissioner Uyeda marked the departure of Commissioner Peirce, who led the SEC’s Crypto Task Force.
The SEC’s fact sheet states that “a permitted custodian under the current custody rules may not be readily available to hold certain crypto assets.”
Adviser self-custody
An adviser could hold a client’s crypto assets itself only if it determines that “a permitted custodian is not available”, before taking self-custody and quarterly thereafter. The fact sheet lists further conditions, including that the adviser:
has expertise in safeguarding each crypto asset and maintains systems to protect it, including private key management and joint authorisation of transactions by at least two people;
holds each client’s crypto assets in addresses that store only that client’s assets;
mitigates cybersecurity risks and reviews its controls at least annually;
obtains internal control reports from an independent public accountant within six months of taking self-custody and annually thereafter;
sends account statements to the client at least quarterly; and
agrees in writing with the client to treat each crypto asset in self-custody as a “financial asset”, to provide additional protections under applicable state law.
For a regulated fund, the board would review, initially and quarterly, the adviser’s written report on why no qualified custodian is available. It would also determine, before the adviser holds the asset and annually, that the asset would be subject to reasonable care in the adviser’s self-custody. (The fact sheet uses “qualified custodian” in this passage and “permitted custodian” elsewhere.)
State trust companies
Advisers and regulated funds could use a state trust company as custodian for crypto assets. Before engaging it, and annually, the adviser or fund must have a reasonable basis, after due inquiry, for believing that the trust company is authorised by the relevant state banking authority to provide crypto asset custody, and that it maintains and implements written policies and procedures reasonably designed to safeguard crypto assets and related cash and/or cash equivalents from the risk of theft, loss, misuse and misappropriation. The adviser or fund must also, on the same timetable, receive and review the trust company’s most recent annual audited financial statements and internal control report on the same timetable. Client assets must be segregated from the trust company’s proprietary assets.
The release lists the 2025 State Trust Company no-action letter among staff statements on these topics, and states that the Commission would supersede inconsistent staff views would be superseded if the rule is adopted.
Trading platforms
The proposing release states that the Commission “explored and rejected the possibility of proposing a new, stand-alone rule to permit advisers and regulated funds to maintain assets on trading platforms that are not permitted custodians (sometimes referred to as the practice of custodying assets ‘on exchange’) under certain conditions”. It states that the Commission does “not have evidence indicating there is need for such a rule at this time”, and that extending custody to trading platforms could potentially increase the risk of loss, theft, misuse or misappropriation unless such a rule included conditions matched to those platforms’ capabilities and risks.
The release also describes practices reported to staff in outreach. These include some exchanges with affiliated custodians permitting trading out of an omnibus wallet held at the affiliated custodian. Where trades must be prefunded, some platforms arrange for the assets to be placed with a separate counterparty that is a permitted custodian, such as a broker-dealer or futures commission merchant, which the release says “may help to address custody rule problems”.
The Commission also invites comment. Question 181 asks whether commenters agree that a separate, stand-alone trading platform custody rule for advisers and funds is unnecessary. Question 182 asks whether advisers should be permitted to place client crypto assets at a crypto trading platform for trading, under certain conditions. The possible conditions it lists include that the platform be subject to the jurisdiction of a federal or state regulator with power to examine or audit it, that assets not be held on the platform for longer than 24 hours, and that the adviser review the platform’s safeguarding policies and obtain internal control reports.
Scope
The release notes that a crypto asset “may or may not meet the definition of a ‘security’ under the Federal securities laws”. It states that the Advisers Act amendments “would only apply with respect to crypto assets that are funds or securities (or, with respect to the account of a regulated fund, a security or similar investment)”, and that the Investment Company Act rules would apply only to crypto assets that are securities or similar investments.
Other changes
The proposal also includes wider amendments to the custody, recordkeeping and reporting rules. According to the fact sheet, these include:
removing the requirement that accountants performing custody rule work be registered with, and inspected by, the Public Company Accounting Oversight Board;
exceptions from the Advisers Act custody rule for certain discretionary trading authority and inadvertent custody, and an exception from the independent verification requirement where custody arises solely from a standing letter of authorisation;
changes to broker-dealer custody for regulated funds;
allowing records kept on a crypto network to satisfy recordkeeping requirements, subject to conditions; and
amendments to Form ADV and Form N-CEN to collect additional information on the custody of crypto assets and tokenised fund shares.
Implications for CASPs
The following points are our assessment rather than statements in the proposal.
Custody structure. A crypto-asset service provider (CASP) that owns a state trust company, or has a bank or broker-dealer custody affiliate, could offer advisers custody and trading together. A CASP without one would need to work alongside a separate custodian to serve the same clients.
Trading arrangements. Arrangements that keep adviser assets with a permitted custodian during trading, such as off-exchange settlement or trading from a wallet at an affiliated custodian, match the practices the release describes. Balances held directly on a platform that is not a permitted custodian do not, unless the Commission takes up the approach in Question 182.
Self-custody as a fallback. Because self-custody is available only where no permitted custodian is available, and is re-tested quarterly, custodians that support a wider range of crypto assets would reduce the scope for it.
Timing. This is a proposal. Nothing changes until a final rule is adopted and takes effect, and no adoption date has been set. The release proposes that advisers and funds could rely on the self-custody and state trust company provisions from the effective date, once they can comply with the conditions and recordkeeping requirements.
Timeline
1 October 2026. Proposal issued; File No. S7-2026-35.
Comment period. Comments can be submitted now through the SEC’s rule page. The deadline is 60 days after publication in the Federal Register, which had not occurred as of 2 October 2026.
Final rule. Not yet scheduled.
Sources
James Ross, Head of Advisory, denouement. This note is for information only and is not legal advice.
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