SEC Proposes Easing Crypto Custody Rules for Investment Advisers
The US Securities and Exchange Commission has proposed relaxing the custody requirements that have long prevented investment advisers from offering clients direct exposure to digital assets. If adopted, the rule changes would allow advisers to hold clients' crypto themselves when no eligible third-party custodian exists, and would open the door for state trust companies to serve as qualifying custodians. For accounting firms, fund administrators, and CFOs supporting registered investment advisers, the proposal reshapes the operational and compliance landscape around digital asset accounting software and custody oversight.
Why the Existing Rules Created a Custody Bottleneck
Under current SEC rules, investment advisers must generally hold client assets with a "qualified custodian," a category that has been difficult for many crypto tokens to satisfy. The problem is structural: not every token has an eligible institutional custodian willing or able to hold it. That gap has forced some advisers to decline token allocations for client portfolios or to ask portfolio companies to hold assets until a compliant custody solution became available, a dynamic the Digital Chamber flagged to the SEC in a May 2025 submission.
SEC Chair Paul Atkins framed the issue directly in his statement accompanying the proposal, noting that the crypto market has grown into a multi-trillion-dollar asset class while the agency's rules have failed to keep pace. Commissioner Hester Peirce described the situation as a regulatory "roller coaster," with advisers effectively "gritting their teeth and holding on for dear life" while waiting for workable guidance.
The Practical Consequence for Firms
The custody gap has had a measurable chilling effect on product development. Advisers who could not locate a permitted custodian for a given token were, in practice, unable to offer that token to clients without taking on significant regulatory risk. That constraint has limited the range of digital asset strategies available through regulated channels, pushing some activity toward less-regulated structures. The SEC's proposal is a direct attempt to resolve that impasse without waiting for Congress to act.
What the SEC Proposal Actually Permits
The proposal introduces two distinct pathways to address the custody gap, each carrying its own conditions.
Adviser Self-Custody
Investment advisers would be permitted to hold clients' crypto assets directly, but only after establishing that no permitted custodian is available for that specific asset. That determination cannot be made once and forgotten: advisers would need to reassess it at least quarterly. If an eligible custodian becomes available, the assets must be transferred as soon as reasonably practicable.
Self-custody would also require robust operational controls. The proposal specifies safeguards around private key management, cybersecurity practices, and the segregation of each client's holdings from those of other clients. Critically, any transfer of a self-custodied crypto asset would require approval from at least two authorized individuals, introducing a dual-control requirement analogous to controls commonly seen in institutional treasury and payment systems.
Commissioner Mark Uyeda acknowledged in his statement that adviser self-custody creates "an inherent conflict of interest," given that the adviser simultaneously manages and holds client assets. The proposal preserves existing fiduciary duties in full, meaning advisers would still owe clients the same duty of loyalty and care that applies across all their activities.
Regulated Funds and State Trust Companies
Regulated funds would also be permitted to keep crypto assets in self-custody with their investment adviser, provided the adviser meets all of the self-custody requirements described above and the fund's board actively oversees the arrangement. Board-level governance over custody is a meaningful addition: it places accountability at the highest level of a fund's structure and creates a clear audit trail for oversight.
The proposal separately expands the custodian universe by allowing state trust companies to qualify. A state trust company is a financial firm authorized by a US state to hold assets on behalf of others. To qualify under the proposal, a state trust company would need to demonstrate authorization by the relevant state authority to provide crypto custody, maintain reasonable procedures to protect assets against loss, theft, and misappropriation, produce audited financial statements and internal control reports, and segregate client holdings from the company's own assets. These conditions mirror the kind of operational and audit standards that institutional clients already expect from traditional custodians.
Audit, Recordkeeping, and Disclosure Changes
Beyond custody mechanics, the proposal includes amendments to audit, recordkeeping, and disclosure requirements. The specifics of those amendments remain subject to the public comment process, but their inclusion signals that the SEC intends this to be a comprehensive update rather than a narrow carve-out. Firms should monitor the final text of any proposed disclosure requirements closely, as they are likely to affect how digital asset positions are reported to clients and regulators.
Regulatory Context: Acting Without Congress
The proposal does not emerge in isolation. The CLARITY Act, which aimed to draw clearer jurisdictional lines between the SEC and the Commodity Futures Trading Commission over digital assets, failed to advance in the Senate last month. Rather than waiting for fresh legislation, both agencies have begun moving through their existing rulemaking powers.
The CFTC has submitted a separate proposal for White House review, while the SEC has also proposed a framework for trading tokenized stocks. Together, these moves represent a deliberate strategy to establish workable crypto rules using current statutory authority, with the SEC's custody proposal sitting at the center of that effort for the investment adviser and fund community.
The proposal will be open for public comment for 60 days following publication in the Federal Register. That window gives accounting firms, compliance officers, and CFOs an opportunity to engage with the rulemaking directly before provisions are finalized.
Accounting and Operational Implications for Firms
For accounting professionals and CFOs advising registered investment advisers or operating within fund structures, the proposal raises several immediate questions that require action before any final rule takes effect.
Custody Classification and Balance Sheet Treatment
If an adviser self-custodies client crypto, the accounting treatment of those assets becomes a critical question. Are they on the adviser's balance sheet? Are they held in trust for clients and therefore off-balance-sheet? The answer turns on the legal form of the custody arrangement and the terms of the advisory agreement. Under ASC 350-60, the SEC's existing fair value measurement framework for digital assets held on corporate balance sheets applies to assets the entity controls. Advisers and their auditors will need to determine clearly whether self-custodied client assets meet the definition of a controlled asset for the adviser, or whether they are agency assets held on behalf of clients.
This distinction has direct consequences for financial statement presentation, capital adequacy, and insurance requirements. Firms running digital asset accounting software should ensure their systems can flag assets by custody type and generate the granular audit trail that self-custody controls will require, including records of dual-authorization approvals for every transfer.
Internal Controls and Audit Readiness
The dual-control requirement for asset transfers, combined with quarterly reassessment of custodian availability and board oversight for funds, creates a substantial internal control framework. For firms subject to SOC reporting or external audit, these controls will need to be designed, documented, and tested before they can be relied upon. Auditors reviewing investment adviser financial statements will need to understand whether self-custody conditions were met and whether the quarterly reassessment process was properly executed.
State trust companies seeking to qualify as crypto custodians face a parallel obligation: audited financials and internal control reports are explicit prerequisites under the proposal. Firms advising state trust companies or helping them build custody infrastructure should begin mapping the control environment now, ahead of any final rule.
Conflict-of-Interest Documentation
Commissioner Uyeda's acknowledgment that adviser self-custody creates an inherent conflict of interest is not merely an observation, it is a signal that regulators will scrutinize how advisers document and manage that conflict. Compliance programs will need written policies addressing the conflict, client disclosure protocols, and evidence that fiduciary obligations were met throughout the self-custody period. Accounting firms supporting advisers on compliance audits should factor this into their engagement scope.
What Firms Should Do Now
The proposal is not yet final, and the 60-day comment window means the rules could change before adoption. But the direction of travel is clear enough to justify early preparation across several fronts.
Steps to Take Before the Final Rule
Accounting firms and CFOs supporting investment advisers should consider reviewing current custody arrangements to identify any assets that lack a qualified custodian today. Mapping those gaps against the proposed self-custody conditions will clarify how much of the new framework an adviser would actually need to use. Internal control frameworks for private key management and dual-authorization should be scoped and costed now, since building those controls takes time and any final rule is likely to include a transition period rather than an immediate compliance date.
For firms working with or advising state trust companies, a gap analysis against the proposed custodian conditions, particularly around audit readiness and internal control reporting, should be a near-term priority. Firms that have already deployed digital asset accounting software with robust custody tracking and audit trail functionality will have a head start on demonstrating compliance readiness.
Finally, the 60-day comment period represents a genuine opportunity. Firms with specific views on how the self-custody conditions would operate in practice, or on the accounting treatment of self-custodied client assets, should consider submitting comments to the SEC. Regulatory outcomes are shaped by the quality of industry feedback, and accounting practitioners are well placed to identify implementation issues that the agency may not have fully anticipated.
Source: Cointelegraph
Frequently Asked Questions
What does the SEC's proposed rule change for investment advisers holding crypto?
The proposal would allow investment advisers to hold clients' crypto assets directly when no eligible third-party custodian is available for a specific token. Conditions include quarterly reassessment of custodian availability, dual-authorization controls for transfers, private key safeguards, and client asset segregation. If a qualified custodian becomes available, assets must be transferred as soon as reasonably practicable.
How does this affect the accounting treatment of self-custodied client crypto?
The key question is whether self-custodied client assets sit on the adviser's balance sheet or are held off-balance-sheet as agency assets. That determination depends on the legal structure of the custody arrangement and the terms of the advisory agreement. Advisers and their auditors will need to apply the relevant accounting standards, including ASC 350-60 for digital assets, carefully to reach and document the correct classification.
What conditions must a state trust company meet to serve as a crypto custodian under the proposal?
A state trust company would need authorization from the relevant state authority to provide crypto custody, reasonable safeguards against asset loss, theft, and misappropriation, audited financial statements, internal control reports, and segregation of client holdings from the company's own assets.
Does the proposal remove fiduciary duties for advisers that self-custody client crypto?
No. The proposal explicitly preserves advisers' existing fiduciary obligations in full. Commissioner Mark Uyeda noted in his statement that adviser self-custody creates an inherent conflict of interest, and that fiduciary duties continue to apply throughout any self-custody arrangement.
When will the rules take effect, and can firms comment on the proposal?
The proposal is open for public comment for 60 days after publication in the Federal Register. No final adoption date has been announced. Firms with views on the practical operation of the self-custody conditions or the accounting implications should consider submitting formal comments to the SEC during that window.