SEC Proposes New Crypto Custody Framework for Funds and State Trusts

The Securities and Exchange Commission proposed a new crypto custody framework for investment advisers and regulated funds, creating paths for qualified custodians, state-chartered trust companies and conditional direct custody when outside providers are unavailable.

Under the proposal, an adviser choosing direct custody would need written evidence that no qualified custodian can support the asset and would have to reassess that determination at least quarterly. Each transaction would require authorization from at least two people, while client assets would be held in separate blockchain addresses.

The controls would also include annual cybersecurity reviews, quarterly client statements and an independent public accountant’s internal-control report within six months of starting direct custody. Fund boards would review the lack of an available qualified custodian at the outset and quarterly afterward.

State-chartered trust companies could provide custody after specialized due diligence, including reviews of authorization, audited financial statements and internal-control reports. They would also have to segregate client and fund assets and explain how staking, forks, airdrops and network migrations would be handled.

The SEC would add crypto custody information to Form ADV and Form N-CEN. The proposal’s comment period will run for 60 days after publication in the Federal Register, and the final requirements may change.