The SEC’s Proposed Crypto Custody Rule: A Path Out of the Regulatory Gray Area

Since Bitcoin emerged in 2008, crypto assets have developed from an experimental payment technology into a significant market encompassing cryptocurrencies, stablecoins, tokenized securities, and other blockchain-based assets. Investor interest has expanded accordingly, including among private funds, registered investment companies, and clients of registered investment advisers.[1] The Securities and Exchange Commission’s (“SEC”) proposing materials recognize both Bitcoin’s 2008 origins and the substantial subsequent growth in investor demand.

The regulatory framework has not developed at the same pace. Federal oversight has been divided among agencies applying statutes and regulations that generally predate blockchain technology. The SEC has concentrated on the federal securities laws, while the Commodity Futures Trading Commission, federal banking regulators, the Treasury Department, and state authorities have addressed commodities, banking, anti-money-laundering, and consumer-protection issues.

Although these efforts produced enforcement actions and agency guidance, they did not establish a comprehensive custody framework for registered advisers and fund managers. Advisers have faced uncertainty over whether particular crypto assets are securities, whether institutions holding them qualify as permitted custodians, and whether control of cryptographic private keys constitutes custody under rules designed primarily for cash and traditional securities.[2]

Why Crypto Custody Has Been Difficult

The existing investment-adviser custody rule generally requires a registered adviser with custody of client funds or securities to maintain those assets with a qualified custodian, subject to certain exceptions. Qualified custodians ordinarily include banks, registered broker-dealers, registered futures commission merchants, and certain foreign financial institutions.[3]

Crypto assets do not always fit comfortably within this structure. Control may depend on access to a private key rather than possession of a certificate or an entry on a traditional financial institution’s records. A lost or compromised key may result in permanent loss, while blockchain transactions may be difficult or impossible to reverse.

There is also a practical shortage of eligible custodians for certain crypto assets. The SEC acknowledges that permitted custodians may not be available for every crypto asset and that existing custodians may not support new or novel tokens. State-chartered trust companies have attempted to fill this gap, but advisers and funds have faced uncertainty over whether a particular trust company qualifies as a bank or other permitted custodian under applicable law.[4]

In February 2023, the SEC proposed a broader safeguarding rule that would have expanded the assets covered by the investment-adviser custody framework. Critics questioned whether advisers would have workable custody options for crypto assets that qualified custodians did not support. The SEC did not adopt that proposal and formally withdrew it on June 12, 2025.[5]

The SEC’s 2026 Proposal

On October 1, 2026, the SEC proposed the Adviser and Regulated Fund Custody Rules; Crypto Custody Rules. The proposal would amend custody requirements under the Investment Advisers Act of 1940, as amended, and the Investment Company Act of 1940. Most significantly, it would establish two potential custody alternatives: conditional self-custody and custody through qualifying state trust companies.[6]

Conditional Self-Custody

A registered adviser could self-custody a client’s crypto asset if it determines that a permitted custodian is unavailable for that asset. The adviser would have to make the determination before beginning self-custody and review it at least quarterly.

Self-custody would be subject to substantial safeguards. An adviser would need documented expertise concerning each asset, systems for protecting private keys, and authorization by at least two people for crypto transactions. It would also have to maintain each client’s assets in addresses containing only that client’s assets, implement cybersecurity controls, obtain periodic internal-control reports from an independent public accountant, and provide quarterly account statements. The adviser and client would also agree in writing to treat each self-custodied crypto asset as a financial asset under applicable state law.

If the client is a regulated fund, its board would have additional oversight responsibilities. The board would review the adviser’s determination that no permitted custodian is available and assess whether the proposed arrangement provides reasonable care for the fund’s assets.[7]

State Trust Company Custody

The proposal would also permit advisers and regulated funds to use state trust companies for crypto custody. Before engaging such a company, and annually thereafter, the adviser or fund would need a reasonable basis for concluding that it is authorized to provide crypto custody and has appropriate safeguarding policies.

The adviser or fund would review the trust company’s annual audited financial statements and internal-control report. Client and fund assets would also have to remain segregated from the trust company’s proprietary assets.

The proposal contains additional modernization measures involving discretionary trading authority, standing letters of authorization, inadvertent custody, audits, recordkeeping, and reporting on Forms ADV and N-CEN.[8]

When Could the Rule Become Official?

The proposal was issued on October 1, 2026, published in the Federal Register on October 6, 2026, and is currently open for public comment through December 7, 2026. After the comment period, the SEC may revise the proposal, issue a new proposal, adopt a final rule, or decline to proceed. No official deadline requires the SEC to complete that process by a particular date. Adoption before the end of 2026 appears unlikely. A final rule would establish its effective date and compliance deadlines. The SEC is considering whether certain provisions should apply on the effective date or after a transition period, potentially six months or one year.[9] The proposal is therefore an important, albeit preliminary, step toward a workable federal custody framework. For the first time, advisers and regulated funds may receive an express pathway to hold crypto assets when traditional custodians are unavailable. Whether that pathway proves practical will depend on the final conditions, compliance costs, and the SEC’s response to public comments.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Robert R. Boeche, II can be reached in the firm’s San Diego office at (619) 696-9500.

---

[1] Adviser and Regulated Fund Custody Rules; Crypto Custody Rules, 91 Fed. Reg. 63,870, 63,878–80 (proposed Oct. 6, 2026) (to be codified at 17 C.F.R. pts. 270, 274, 275 & 279).

[2] Id.

[3] 17 C.F.R. § 275.206(4)-2(a), (d)(6) (2026); Adviser and Regulated Fund Custody Rules, 91 Fed. Reg. at 63,878–79.

[4] Adviser and Regulated Fund Custody Rules, 91 Fed. Reg. at 63,880–84.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.