SEC Proposes Crypto Custody Framework for Investment Advisers and Funds

The U.S. Securities and Exchange Commission has released a proposed regulatory framework that would allow registered investment advisers and regulated funds to custody crypto assets under a defined set of rules, including provisions for self-custody and the use of state trust companies. For accounting firms, fund administrators, and CFOs, the proposal redraws the compliance landscape for how digital assets are held, reported, and overseen at the institutional level. It also arrives at an accelerated pace following the Senate's defeat of the Clarity Act, signalling that agency-level rulemaking is now the primary vehicle for US crypto regulation.

Why the SEC Is Acting Now

Custody of crypto assets has long been a friction point for institutional investors. The Investment Advisers Act of 1940 and associated custody rules were written decades before blockchain technology existed. As SEC Chair Paul Atkins acknowledged in releasing the proposal, "our rules and regulations have not kept pace" with a market that has grown from a niche experiment after Bitcoin's 2008 launch into a multi-trillion-dollar asset class.

The political catalyst is equally significant. After the Clarity Act failed to advance through the Senate, both the SEC and the Commodity Futures Trading Commission moved quickly to fill the regulatory vacuum through their own rulemaking authority. The SEC had already released a separate proposed framework for crypto asset offerings in the days following that vote, and this custody proposal represents the next concrete step in what Chair Atkins described as an ongoing push to "cement the United States as the crypto capital of the world."

The Post-Clarity Act Acceleration

Industry observers have noted the speed of the SEC's output. NovaDius President Nate Geraci captured the mood on social media, writing that regulators are "moving quickly and aggressively" and suggesting some legislators may regret that the Clarity Act did not pass. Whether or not one agrees with that political read, the operational reality for advisers and fund managers is clear: the SEC is building a rulebook with or without Congress, and firms need to engage with the details of each proposal now.

What the Proposed Framework Actually Covers

The proposal targets a structural gap: qualified custodial infrastructure for certain crypto assets either does not exist yet or is not accessible to all categories of institutional investor. The framework attempts to create workable pathways for three distinct custody arrangements.

State Trust Companies as Custodians

Under the proposal, state-chartered trust companies would be eligible to serve as custodians for both client crypto assets and regulated fund crypto assets. This is a meaningful expansion of the approved custodian list for advisers and funds, many of which currently have limited options when seeking a regulated entity willing to hold digital assets on their behalf. For fund administrators and prime brokers, this opens a new category of counterparty to evaluate in due diligence and service agreements.

Self-Custody Under Limited Circumstances

The proposal would permit investment advisers to self-custody client and fund crypto assets, but only under defined conditions, most notably when the adviser determines that no permitted custodian is available for a particular asset. The SEC was careful to clarify the terminology here: "self-custody" in this context means the adviser acting as custodian, not the underlying investor controlling private keys directly. Commissioner Hester Peirce addressed this distinction directly, stating that "true self-custody is not the right choice for everyone" but that regulators "should zealously protect investors' right to self-custody and not attempt to force investors to custody their assets with someone else." Her broader point was that the adviser-level self-custody provision is a regulatory accommodation, not a restriction on individual ownership rights.

Direct Holdings for Asset Managers

The framework would also allow crypto assets to be held directly by asset managers, hedge funds, and other institutional participants in certain circumstances, rather than requiring all positions to flow through an intermediary. This is particularly relevant for managers running strategies that require rapid settlement, on-chain execution, or direct exposure to assets for which no intermediary custody solution currently exists.

Accounting and Financial Reporting Implications

The custody framework has direct consequences for how digital assets appear on financial statements, and for the work accounting firms and auditors do in verifying those positions.

Balance Sheet Recognition and Control

Under both US GAAP (specifically ASC 350-60, the FASB standard for crypto assets) and IFRS, recognition of a crypto asset on the balance sheet depends on the entity controlling the asset. When an adviser holds assets in self-custody on behalf of clients, the question of whether those assets belong on the adviser's balance sheet or the client's, and under what conditions they would be derecognised, becomes a live issue. The SEC's clarification that self-custody here means the adviser acting as custodian, not the client, has direct read-across to control-based derecognition tests.

For funds subject to ASC 350-60, which requires fair value measurement with changes recognised in net income each reporting period, the custody arrangement does not change the measurement model, but it does affect the audit evidence available to support valuation. When assets are held with a regulated third-party custodian, auditors can obtain confirmations; when the adviser self-custodies, the evidence trail shifts to key management procedures, wallet address verification, and on-chain reconciliation.

Audit Considerations for Self-Custody Arrangements

Firms auditing investment advisers or funds that elect self-custody under the proposed rules will need to revisit their procedures. The standard bank confirmation approach does not apply to self-custodied digital assets. Audit teams will need to assess controls around private key management, consider whether on-chain verification constitutes sufficient evidence of existence and ownership, and evaluate the risk of management override in environments where the adviser controls both the asset and the record of the asset. This is not a trivial adjustment to audit methodology.

The proposal is still at the comment stage, so the final form of any self-custody provisions may differ materially from what is currently on the table. Accounting firms would be well placed to submit comment letters addressing the auditability of self-custody arrangements, given that auditor capacity to verify positions is a practical constraint the SEC may not have fully modelled.

Crypto Financial Statements: What Changes for Fund Administrators

Fund administrators preparing financial statements for regulated funds that hold crypto will need updated custody confirmation procedures regardless of which custodian type is used. State trust companies, if they become an accepted custodian class, will need to be vetted for their ability to produce standard confirmation letters in formats acceptable to auditors. Administrators should also consider how side-pocket or illiquid asset treatments might interact with self-custody provisions, particularly for assets where no third-party custodian is currently available.

Practical Steps for Accounting Firms and CFOs

The proposal is open for comment and has not yet been finalised. That does not mean firms should wait. The comment period is the moment of greatest leverage, and the practical preparation work needs to begin regardless of how specific provisions evolve.

Immediate Actions

Accounting firms advising investment adviser clients should review existing custody agreements and identify which assets are currently held with custodians that may not meet the proposed framework's criteria. Any gaps between current arrangements and the proposed permitted custodian list should be documented now, so that transitions can be planned in an orderly way rather than under deadline pressure once the rule is finalised.

CFOs at asset management firms should brief their audit committees on the proposed framework, with particular emphasis on the self-custody provisions and the implications for audit evidence. If the firm is considering electing self-custody for any asset class, the internal control environment around key management needs to be assessed before that election is made, not after the auditors raise questions at year-end.

For firms that are also navigating the FASB's ASC 350-60 fair value requirements for crypto assets already on their books, the custody question intersects with the measurement question: fair value under ASC 350-60 requires reference to observable market prices, and custody arrangements that limit access to liquid markets could complicate both the measurement and the audit of those measurements. A related question, on how ASC 350-60 handles derecognition in complex custody structures, is examined in detail in our piece on FASB's crypto derecognition rules for wrapped tokens and lending arrangements.

Firms also tracking the broader pace of US crypto rulemaking, including the parallel CFTC workstreams that emerged after the Clarity Act's failure, should review our earlier analysis of what the SEC and CFTC have each put forward since the Clarity Act stalled.

What Comes Next

Chair Atkins indicated explicitly that more regulatory proposals are coming. Given the pace of releases since the Clarity Act's defeat, firms should assume that custody rules, offering frameworks, and potentially reporting requirements will continue to stack up through late 2026 and into 2027. Each proposal carries its own comment period and its own implementation runway, but the cumulative compliance workload is building quickly.

The self-custody provision, in particular, is likely to generate significant comment. Questions around investor protection, auditability, and the conditions under which an adviser can determine that "no permitted custodian is available" are all areas where practitioner input could shape the final rule materially. Accounting and audit firms have standing and expertise to contribute to that process, and the comment window is the time to do it.

Source: The Block