SEC proposes new crypto custody framework as investor protection debate intensifies

Should investment advisers be allowed to hold clients’ crypto assets themselves?

The SEC has proposed a new cryptocurrency custody framework as the debate around protection for investors in the asset class deepens.

The October 1 proposal would allow qualifying state-chartered trust companies to act as custodians of crypto assets and modernize parts of the custody rules under the Investment Advisers Act and Investment Company Act.

The SEC said the changes are intended to address a gap between existing custody requirements and the practical realities of crypto markets. The proposal would provide a ‘clear regulatory framework’ and give advisers and funds a ‘compliant pathway where none existed before’, SEC chair Paul Atkins said.

‘Since the advent of Bitcoin in 2008, the crypto asset market has grown from a niche curiosity into a multi-trillion-dollar asset class,’ Atkins noted, adding that existing rules ‘have not kept pace’.

The proposal is part of a broader series of SEC initiatives under Atkins aimed at establishing a more defined regulatory framework for crypto. In August, the agency proposed Regulation Crypto Assets, which would create tailored exemptions from securities registration for certain investment contracts involving crypto assets and a conditional safe harbor under which certain assets could cease to be treated as investment contracts.