The U.S. Securities and Exchange Commission's proposed crypto custody fallback would cost advisers an estimated $433,833 per year to operate, according to the agency's own economic analysis, an expense the SEC explicitly anticipates will push smaller firms out of offering the service while leaving larger advisers with a structural advantage.

The commission approved the proposal on Oct. 1 under file number IA-7023. It would let registered investment advisers hold covered client crypto assets themselves when an eligible qualified custodian is unavailable, subject to a set of operational safeguards. The SEC's Table 8 models recurring annual costs of $433,833 per adviser that elects the fallback, in 2026 dollars.

The largest component is an independent internal control report, priced at an average of $376,000 per year. The SEC derived that figure from an inflation-adjusted prior estimate in its Paperwork Reduction Act analysis, rounded to the nearest $1,000. Recurring internal compliance work adds $57,833 annually, with an initial one-time compliance outlay of $173,499. The internal estimate assumes 300 initial hours and 100 recurring hours at $578.33 per hour.

The subtotal excludes technology, software, hardware and associated systems — costs the SEC expects to be economically significant. Recordkeeping and disclosure burdens sit in separate tables, meaning the $433,833 figure cannot serve as a complete operating budget.

For the burden calculation, the agency assumes roughly 823 advisers — 5% of the 16,442 registered advisers — would use the self-custody option, while cautioning that actual uptake may be lower.

Scale as the deciding variable

The economic analysis states plainly that smaller advisers may decline self-custody because of the expense of safeguarding assets and arranging independent oversight, while larger advisers could have sufficient resources to meet the safeguards. Larger firms can also share costs across a broader client base, multiple assets or affiliated businesses.

The SEC does not establish a universal minimum firm size. An adviser with substantial assets under management may hold only a small pool of covered crypto needing the fallback; a crypto-focused adviser may already have the infrastructure another firm would need to build. The agency expects many direct costs would pass through to clients via fees or expenses, and warns that demand for accountants able to assess crypto controls could make those services harder to obtain — particularly for smaller advisers with less bargaining power.

The practical consequence for clients: an asset might become available through an adviser with sufficient custody resources while remaining outside another adviser's offering.

Commissioner Peirce distinguishes self-custody

SEC Commissioner Hester Peirce drew a line between adviser self-custody under the proposal and investors holding their own keys. Under the fallback, an intermediary would hold clients' key materials, potentially including a non-controlling portion, and clients would still depend on that intermediary's safeguards.

Commissioner Mark Uyeda's statement outlines the proposed conditions: safeguarding expertise, cybersecurity protections, annual reviews, reporting and client disclosures. Advisers would need asset-specific key-management expertise, authorization by two or more designated people, and segregation of each client's assets. The first independent control report would come due within six months of taking self-custody and at least annually thereafter, including reconciliation to the underlying crypto network.

An option that can expire

The fallback is asset-specific and perishable. An adviser must have a written reasonable basis, after due inquiry, that no qualified custodian will maintain each asset — determined before taking custody and at least quarterly afterward. Custodian cost cannot drive that determination. Once an adviser learns a qualified custodian has become available, it must transfer the asset as soon as reasonably practicable, an obligation that could arise between quarterly reviews. A firm could build infrastructure for an asset and then be forced to migrate it, potentially leaving a narrow set of unsupported assets to carry the remaining expense.

If no client crypto assets remain in self-custody by a report's due date, that report would not be required.

Alternatives narrow the advantage

Peirce's Sept. 30, 2025 statement described conditional staff no-action relief for certain state trust companies and identified national and state banks as permissible custodians. The October proposal would also permit eligible state trust companies to custody crypto assets, subject to initial and annual due inquiry. Where an eligible institution supports an asset, clients may gain access without their adviser building the fallback arrangement — though a firm authorized for crypto custody does not necessarily support every asset a client wants.

How widely clients benefit will depend on firms' actual implementation costs, independent-accountant pricing, and the range of assets eligible custodians begin to support as the proposal moves through the comment and adoption process.