SEC proposes conditional crypto self-custody for advisers and funds

The U.S. Securities and Exchange Commission on Oct. 1 proposed rules that would let registered investment advisers and regulated funds custody some crypto assets themselves under specified conditions. The SEC said the framework would provide a compliant custody route for assets that may lack an available custodian, according to its proposal announcement.

Which crypto assets could advisers hold themselves?

The proposal would let advisers hold clients’ crypto assets, including assets of regulated funds they advise, by possessing some or all of the private key material needed to access and transact in them. The SEC’s proposed rule would apply to crypto assets that are funds or securities under the Advisers Act; the fund custody provisions would cover crypto securities and similar investments.

Self-custody would be conditional. An adviser would have to determine in writing, before holding an asset and at least quarterly afterward, that a permitted custodian is unavailable for it. The proposal would also allow advisers and regulated funds to use state trust companies as custodians, subject to conditions.

What safeguards would advisers have to put in place?

Advisers would need expertise in safeguarding each asset and written support for that assessment. They would also have to maintain systems to protect assets from loss, theft, misuse and misappropriation.

The SEC’s proposed minimum controls include private-key management, joint approval of crypto transactions by at least two people, and separate blockchain addresses for each client’s assets. The conditions address the risks of an adviser controlling client assets and would require advisers to document their custody arrangements.

How would regulated fund boards oversee the arrangement?

A regulated fund could keep crypto with its adviser only if the adviser met the self-custody conditions and the fund’s board oversaw the arrangement. The board would review the adviser’s written explanation that no qualified custodian was available before custody began and quarterly afterward.

The board would also have to assess whether the adviser could provide reasonable care for the asset before custody began and annually thereafter. These requirements apply to the proposed fund self-custody route; the SEC’s release also proposes broader changes to custody, reporting and recordkeeping rules.

The proposal is not final. The SEC says comments are due 60 days after the proposal is published in the Federal Register; the rule page does not give a calendar deadline. The commission has not confirmed whether or when it will adopt a final rule.