SEC proposed crypto custody framework for advisers and funds
SEC Chair Paul S. Atkins aims to modernize digital asset management through a new regulatory framework effective October 1, 2026. The proposal allows state trust companies to act as qualified custodians and establishes strict operational requirements for advisers using self-custody.
The New Custody Framework
The SEC proposed a new regulatory framework for crypto asset custody on October 1, 2026. This framework targets registered investment advisers, investment companies, and business development companies. Paul S. Atkins, the SEC Chair, aims to provide a compliant pathway for digital assets where current rules for stocks and bonds fail to map onto blockchain technology. The proposal expands the pool of eligible custodians by allowing state trust companies to hold assets for advisers and funds. This change affects how institutions select partners for Bitcoin and other digital assets. The framework addresses the problem where qualified custodial capabilities lag an asset’s deployment by many months. This proposal constitutes a significant part of a broader digital assets agenda.
Rules for Self-Custody and State Entities
The proposal allows advisers to use "self-custody" under narrow conditions. In this context, the adviser acts as the custodian for client assets rather than the individual investor holding their own keys. An adviser may use self-custody only after they determine that no permitted custodian is available, a determination they must repeat every quarter to ensure they meet the high standards for safeguarding client assets. If an adviser chooses this path, they must meet strict operational requirements.
| Requirement | Specific Condition |
|---|---|
| Availability Test | Determination made before use and repeated quarterly |
| Transaction Authorization | Joint authorization by at least two people |
| Asset Segregation | Client assets must sit in addresses holding only that client’s assets |
| Reporting | Internal control reports from independent accountants within six months |
| Review Cycle | Annual review of cybersecurity and management systems |
Advisers must maintain expertise regarding the safeguarding of each crypto asset. They must implement systems to protect assets against loss, theft, misuse, and misappropriation. Firms must also adopt systems that protect assets and review their effectiveness annually. All advisers must provide account statements to each affected client at least quarterly. Finally, the adviser and client must agree in writing to treat each self-custodied crypto asset as a financial asset.
The proposal also enables state trust companies to act as qualified custodians. To use a state trust company, an adviser must verify the firm holds authorization from state banking authorities. They must also review the firm’s audited financial statements and internal control reports. The SEC requires that all client and fund crypto assets remain segregated from the custodian’s proprietary assets. This segregation prevents the commingling of funds. Will the inclusion of state trust companies provide enough competition to satisfy larger institutional needs?
Regulatory Context and Compliance
Commissioner Hester Peirce departs the SEC following this proposal. The agency seeks to move crypto custody from enforcement ambiguity into a notice-and-comment rule. This follows the Senate’s failure to pass the Clarity Act on September 15, 2026. You should prepare for increased scrutiny of how firms manage private keys and signing authority. The proposal covers the following:
- Registered investment advisers
- Investment companies
- Business development companies
The SEC intends to modernize the Advisers Act by removing the requirement for accountants to register with the Public Company Accounting Oversight Board. This change targets antiquated conditions for broker-dealer custody of funds. It also creates exceptions for discretionary trading authority, standing letters of authorization, and inadvertent custody. The 60-day comment period begins once the proposal appears in the Federal Register. The agency also proposed Regulation Crypto on August 18, 2026, which offers tailored exemptions for fundraising of up to $5 million over four years.
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