SEC Proposes New Crypto Custody Framework for Advisors and Funds

The SEC Thursday proposed rules on how registered investment advisors (RIAs) and regulated funds can hold cryptocurrencies. The aim is to provide a compliant route for fund managers who wish to gain exposure to cryptocurrencies, as current custody rules were not designed for this.

• New goalkeepers: State-chartered trust companies could hold cryptocurrencies for clients and advisor funds. This expands a field in which qualified options are rare for certain assets.

• Limited self-guarding: Advisors may hold clients’ cryptocurrencies themselves in certain cases, for example where no approved custodian is available. As Commissioner Hester Peirce underlinesthis means that the advisor acts as the custodian and not the individuals holding their own keys.

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• 180 from 2023: Gensler’s SEC has already proposed changes of custody that critics say would have excluded advisors from crypto by limiting them to a short list of qualified custodians. a16z called the effort “illegal, impractical, and dangerous,” and it was later removed.

• More to come: Comments remain open for 60 days after the proposal is published in the Federal Register, and Chairman Paul Atkins says other proposals are in the works. This follows the SEC’s innovation exemption and CFTC rule filing last month, as regulators move forward after the Clarity Act’s failure in the Senate.

• Big picture: With Clarity at a standstill, crypto regulations are now being drafted, one agency proposal at a time. It’s faster, but it’s also less sustainable, since a future SEC can rewrite the rules much more easily than Congress can repeal a law.