SEC opens the door to adviser self custody of crypto, with strings attached

The SEC has published proposed rulemaking related to the custody of crypto assets by investment advisers. The most newsworthy aspect of the rules is that investment advisers can retain custody of crypto assets under certain narrow circumstances. In most cases advisers would be required to use qualified custodians, and the rules include the expected expansion to include state chartered trust companies within the scope of qualified custodians, but only for crypto assets.

The timing comes as the DTC readies to launch tokenized securities, which count as crypto assets under the proposed rules and would therefore fall within the scope of these custodial provisions.

These custodial rules generally do not apply to BTC, ETH and other cryptocurrencies which are not considered securities, unless they are held in a regulated fund such as a registered investment company or a business development company. Private funds such as hedge funds and venture capital funds are treated as ordinary advisory clients, so BTC and ETH remain out of scope for them. Instead, the rules primarily relate to the custody of funds, including stablecoins and tokenized deposits, as well as securities. However, they may well apply to newly issued digitally native tokens subject to investment contracts.