The US Securities and Exchange Commission on 1 October proposed new custody rules for registered investment advisers and regulated funds that would, for the first time, allow an adviser to hold a client’s crypto assets itself. The permission is conditional and narrow: self-custody is only available where no permitted custodian can hold the asset. In practice, the proposal answers a problem the SEC’s own fact sheet describes plainly, that custodians “have not been able to support all crypto assets”, particularly “nascent or novel assets”.
Self-custody is a fallback that advisers must justify every quarter
Under the proposed amendments to the Advisers Act custody rule, an adviser could self-custody a client’s crypto asset only after determining that a permitted custodian is not available, both before taking custody and quarterly after that. The adviser must document its safeguarding expertise for each asset and run systems that cover private key management, with joint authorisation by at least two people for any transaction.
Client assets must sit in addresses that hold only that client’s crypto. The adviser must obtain an internal control report from an independent public accountant within six months of starting self-custody and annually after that, review cybersecurity controls at least once a year and send account statements at least quarterly. Adviser and client must also agree in writing to treat each self-custodied asset as a “financial asset”, which brings in additional protections under state commercial law.
The quarterly availability test is the condition that will do the most work. Once a qualified custodian adds support for a token, the adviser’s basis for self-custody falls away and the asset has to move. For an adviser running a portfolio of less liquid tokens, that creates a standing migration project tied to custodians’ product decisions.
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. Unfortunately, our rules and regulations have not kept pace.
SEC Chairman Paul S. Atkins, 1 October 2026
Funds get a route that runs through their adviser and their board
A new Investment Company Act rule would let a regulated fund keep crypto in self-custody through its adviser, provided the adviser meets the adviser rule and the fund board oversees the arrangement. The board must review, at the start and then quarterly, the adviser’s written report on why no qualified custodian is available, and must decide before custody begins, and annually, that the asset would be subject to reasonable care with the adviser.
That puts fund directors in the position of signing off on a custody judgement they will rarely have the technical background to test. Expect fund boards to ask for independent technical reviews before they agree, which adds cost to launching any fund that holds tokens outside the main custodians’ coverage.
State trust companies become permitted custodians with due inquiry
The second change addresses a question that has hung over the market for years: whether a state-chartered limited purpose trust company counts as a “bank” for custody purposes. The fact sheet says that today the answer requires a fact-specific analysis of state and federal law. The proposal would permit state trust companies to hold client and fund crypto assets if, before engagement and annually, the adviser or fund has a reasonable basis after due inquiry to believe the trust company is authorised by its state banking regulator for crypto custody and maintains written safeguarding policies, and has received and reviewed its latest audited financial statements and internal control report. Client assets must be segregated from the trust company’s own assets.
This shifts diligence onto the adviser. A firm that relies on a trust company in one state will need a file showing why it believes that state authorised the activity, and that file will be what examiners ask for first.
The broader custody rewrite affects every adviser
The release also carries changes that have nothing to do with crypto. The Advisers Act custody rule would drop the requirement that accountants performing custody work be registered with and inspected by the PCAOB, add exceptions for discretionary trading authority, standing letters of authorisation and inadvertent custody, and adjust audit delivery deadlines for funds of funds. Business development companies would be confirmed as able to use the Investment Company Act custody rules. Records kept on a crypto network could satisfy recordkeeping requirements, subject to conditions.
The PCAOB change widens the pool of accountants an adviser can hire for custody audits, which is likely to matter most to smaller private fund managers.
What to watch
- Comment period: 60 days after publication of the proposing release in the Federal Register.
- Responses from fund boards and independent directors on the oversight conditions.
- How state banking regulators respond to the due-inquiry standard for trust companies.
- Any interaction with the federal banking agencies’ rules for stablecoin custody under the GENIUS Act.
Primary sources
- US SEC, SEC proposal would address how investment advisers and funds can custody crypto assets under the federal securities laws, 1 October 2026
- US SEC, Fact sheet: Investment adviser and regulated fund custody rules; crypto custody rules, 1 October 2026
- US SEC, Proposed rule, Release No. IA-7023, 1 October 2026
Related: Fed sets stablecoin capital and reserve rules for bank-owned issuers under the GENIUS Act
Photo (cropped): AgnosticPreachersKid, CC BY-SA 3.0 via Wikimedia Commons
