SEC Proposes Custody Rules for Advisers and Funds Holding Crypto
The US Securities and Exchange Commission has proposed a formal framework governing how registered investment advisers and funds may hold crypto assets on behalf of clients. The proposal, released on 1 October 2026, targets a gap that has troubled auditors and CFOs for years: the absence of clear federal standards for the safekeeping of digital assets that fall under the Investment Advisers Act and the Investment Company Act. If adopted, the rules would reshape custody arrangements, alter the audit evidence trail for crypto holdings, and carry direct consequences for how those assets appear on US GAAP-compliant financial statements.
What the SEC Is Proposing
At its core, the proposal aims to clarify which entities can serve as "qualified custodians" for crypto assets held by advisers and funds. Under the existing Safeguarding Rule framework, qualified custodians must meet specific regulatory definitions, most of which were drafted long before digital assets existed in any meaningful commercial sense. The SEC is now proposing to update those definitions to accommodate the technical realities of on-chain asset custody, including private key management, wallet infrastructure, and the absence of traditional title-transfer mechanisms.
Qualified Custodian Criteria for Digital Assets
The proposed rules would require that any entity serving as a qualified custodian for crypto assets demonstrate it can maintain exclusive control over private keys, segregate client assets from its own, and provide the operational and financial safeguards the SEC considers equivalent to those already required for securities. Banks, trust companies, and broker-dealers that already hold qualified custodian status would need to show their existing infrastructure meets these digital-asset-specific requirements. Entities that serve only as custodians for crypto but lack a traditional financial charter may face a higher evidentiary bar.
Recordkeeping and Internal Controls
The proposal also addresses the mechanics of recordkeeping. Custodians would be required to maintain detailed transaction logs sufficient to allow an independent auditor to confirm both the existence and ownership of assets at any given point. This directly affects the audit procedures firms currently apply to crypto holdings, because on-chain records alone have historically been considered insufficient without a corresponding custodian confirmation letter or equivalent attestation. The SEC's proposed recordkeeping standard would effectively codify what many Big Four and mid-tier audit teams already attempt to obtain in practice, but on a mandatory rather than best-efforts basis.
Crypto Financial Statements: The Accounting Dimension
The proposal does not amend FASB's existing guidance under ASC 350-60, which already requires entities to carry crypto assets at fair value with changes recognised in net income. What it does is change the evidentiary foundation underneath those balance sheet figures. If a fund cannot satisfy the SEC's proposed custody standards, the auditor faces a harder path to obtaining sufficient appropriate audit evidence for the existence and rights assertions over crypto holdings. That, in turn, threatens a clean opinion on the crypto financial statements of the entity concerned.
Fair Value Measurement and Custodian Confirmations
Under ASC 350-60, fair value is measured using Level 1 inputs for actively traded crypto assets, which is relatively straightforward. The harder problem has always been the completeness and existence assertions. A custodian operating under the SEC's proposed qualified custodian regime would be legally obligated to maintain the records an auditor needs for those assertions. For CFOs at registered investment advisers and fund operators, this means the choice of custodian is no longer simply an operational decision; it becomes an audit-readiness decision with direct implications for the sign-off process on financial statements.
Implications for IFRS Reporters Operating in the US
Firms that prepare financial statements under IFRS, including foreign private issuers listed on US exchanges, face an additional layer of complexity. IFRS does not have a direct equivalent to ASC 350-60, and the IASB's work on crypto asset accounting under IAS 38 and IAS 2 continues to evolve. However, the SEC's proposed custody standards would apply at the entity level regardless of the accounting framework used. An IFRS reporter holding crypto through a registered adviser would still need to ensure its custodian qualifies under the new SEC framework. The measurement and disclosure treatment would then follow IFRS guidance, but the custody infrastructure would need to satisfy US regulatory requirements. Firms in this position should document that distinction clearly in their compliance mapping.
Who Is Affected and How
The practical perimeter of the proposal is wide. It touches any registered investment adviser that has custody of client crypto assets, any registered fund that holds digital assets directly, and by extension the audit and accounting teams serving those entities. The SEC has made clear that the proposal is not limited to advisers whose primary business is crypto; a traditional wealth manager that began accepting crypto allocations from clients in recent years would also fall within scope if it has custody of those assets.
For Accounting Firms and Auditors
Audit teams will need to revisit their existing client inventories to identify which advisory and fund clients hold crypto directly. For those clients, the proposed qualified custodian rules create a new audit step: confirming that the custodian used by the client meets the SEC's proposed criteria. If a client is using a custodian that does not qualify, the auditor faces a scope problem. Firms should start building that screening question into their client acceptance and continuity procedures now, before the comment period closes and the rule moves toward adoption.
The proposal also has implications for how auditors treat management representations about crypto holdings. Currently, management's assertion that assets are held by a reputable custodian is one input among several. Under the proposed regime, "reputable" would have a regulatory definition, giving auditors a clearer benchmark against which to test that representation. That is, in principle, a positive development for audit quality, though it will require firms to update their audit programmes and training materials.
For CFOs and Finance Teams at Registered Funds
CFOs at registered funds and advisory firms face a near-term operational question: does the current custodian arrangement meet the proposed standards? Answering that requires a review of custodian agreements, wallet infrastructure documentation, and the financial and regulatory standing of the custodian itself. If the answer is no, or even unclear, the CFO needs to either engage the custodian to obtain assurances or begin evaluating alternatives. Waiting until a final rule is published reduces the time available for an orderly transition.
There is also a disclosure dimension. Funds that hold crypto are already required to disclose material risks in their prospectuses and periodic filings. A proposed regulatory change of this significance may itself be a disclosable event, particularly for funds where custody arrangements are central to the investment strategy. Legal and accounting teams should assess whether any interim disclosures are warranted while the rule is in proposed form. For background on how the SEC's broader crypto rulemaking agenda has developed since legislative efforts stalled, the article on SEC rulemaking after the CLARITY Act stalled provides useful context.
Practical Next Steps for Firms
The SEC proposal opens a public comment period, and the rule is not yet final. That window is an opportunity for accounting firms and industry bodies to engage, but it is not a reason to wait on internal preparation. There are several concrete actions firms can take now.
Custody Arrangement Review
Map every crypto holding across your client base or fund portfolio against the custodian currently used. For each custodian, request documentation confirming its regulatory status, key management practices, and segregation procedures. Compare that documentation against the criteria the SEC has outlined in the proposal. Flag any gaps for escalation before the comment period closes.
Audit Programme Updates
Audit teams should incorporate a "qualified custodian assessment" step into their digital asset audit programmes. This does not need to wait for a final rule: the proposed criteria are sufficiently detailed to serve as a working framework. Teams should also revisit how they document the existence and rights assertions for crypto holdings, ensuring the approach is consistent with the evidentiary standards the proposal implies. For firms already grappling with related questions around derecognition, the analysis in the piece on FASB derecognition rules for wrapped tokens and lending is directly relevant.
Comment Letter Consideration
The comment period is the formal channel through which the accounting profession can shape the final rule. Firms with significant exposure to crypto-holding advisory or fund clients have a direct interest in ensuring that the qualified custodian criteria are workable in practice and aligned with existing audit standards. Coordinating with professional bodies such as the AICPA to submit or support a comment letter is a legitimate and constructive use of the comment window.
Broader Regulatory Landscape
The SEC's custody proposal does not exist in isolation. It sits alongside FASB's fair value accounting rules under ASC 350-60 and the evolving IFRS treatment of crypto assets, both of which continue to develop. It also intersects with existing SEC guidance on the offering and registration of crypto assets, which the Commission has been actively updating. Taken together, these developments suggest a US regulatory environment that is moving toward a more structured, standards-based approach to crypto, even as specific rules remain in proposed or transitional form. For CFOs and audit partners, the strategic implication is clear: crypto asset governance needs to be treated with the same rigour applied to any other material balance sheet item, not as an edge case waiting for final rules before it receives proper attention.
Frequently Asked Questions
Does the SEC's proposal change how crypto assets are measured on financial statements?
No. Measurement continues to follow FASB's ASC 350-60 framework, which requires fair value accounting for crypto assets with changes recognised in net income. The proposal addresses custody and safekeeping standards, which affect the audit evidence available to support balance sheet figures, not the measurement methodology itself.
Which entities are in scope for the proposed custody rules?
Any SEC-registered investment adviser that has custody of client crypto assets and any registered fund that holds digital assets directly. The SEC has indicated that advisers whose primary business is not crypto are still captured if they hold client crypto assets in custody.
What does "qualified custodian" mean for digital assets under the proposal?
The proposal would require a qualified custodian for crypto to demonstrate exclusive private key control, client asset segregation, and financial and operational safeguards equivalent to those required for traditional securities custody. Banks, trust companies, and broker-dealers with existing qualified custodian status would need to show their infrastructure meets these digital-asset-specific criteria.
How should auditors respond to the proposal before a final rule is issued?
Firms should use the proposed criteria as a working benchmark now. That means adding a custodian assessment step to digital asset audit programmes, revisiting how existence and rights assertions are documented, and flagging any clients whose custodian arrangements may not meet the proposed standards. The comment period is also an opportunity to engage through professional bodies.
Are IFRS reporters subject to the proposed SEC custody rules?
Yes, at the entity level. The proposed custody framework applies based on the entity's registration status with the SEC, not the accounting standard it uses. An IFRS reporter that is a registered investment adviser holding client crypto assets would need to comply with the SEC's custody rules, while continuing to apply IFRS measurement and disclosure guidance for its financial statements.
Source: Decrypt