The US Securities and Exchange Commission on October 1 proposed amendments to its custody rules that would, for the first time, let registered investment advisers hold certain client and fund crypto assets themselves when no qualified custodian is available, while opening the qualified-custodian market to state-chartered trust companies.

The package remains a proposal, not a final rule. The public comment period will run for 60 days after the proposal appears in the Federal Register; the publication date has not yet been confirmed.

A Direct Route to Custody, With Conditions

The familiar model of crypto custody is a wallet held by an exchange or a specialist custodian. The SEC proposal adds a less conventional option: the adviser itself holding a client's crypto. The fallback is narrow by design. Before taking custody, an adviser must determine that no permitted custodian is available for the asset in question, and it must repeat that determination quarterly, according to a statement by Commissioner Hester Peirce accompanying the proposal.

The mechanism targets a specific operational gap: newly launched assets that reach the market before traditional custodians can support them. In those cases, an adviser currently faces a choice between declining the asset or finding a custodian that may lack the technical capability to safeguard it.

Peirce cautioned against reading the proposal's use of the term "self-custody" too literally. Investors would not control their own assets under this arrangement. She said she preferred the label "shelf-custody," because the adviser would still hold the crypto, just outside the structure of a permitted custodian.

Safeguards and Conflict Management

Allowing an adviser to hold client crypto creates an obvious structural conflict: the party giving investment advice would also safeguard the assets, while its fiduciary duty to the client continues. The proposal responds with a set of operational requirements. An adviser holding crypto directly would need demonstrated expertise in safeguarding crypto assets, cybersecurity protections, annual reviews, internal reporting, account statements, and disclosures to clients.

The specific recordkeeping and audit provisions attached to these requirements were not detailed in the available material. Further detail may emerge during the comment process or in the eventual final rule. The proposal would also update financial statement audit requirements for advisers and revise broker-dealer custody services for regulated funds.

State Trust Companies as Qualified Custodians

The second major change widens the definition of who may serve as a qualified custodian. State-chartered trust companies would be permitted to hold crypto for advisory clients and regulated funds, a shift that could materially expand custody capacity beyond the handful of national banks and specialist firms currently serving the market.

The access comes with conditions. Before engaging a state trust company, an adviser or fund must have a reasonable basis, after due inquiry, to believe the company is authorized by the relevant state banking authority. The adviser must also maintain written policies designed to safeguard the assets. That verification would be required before engagement and once a year thereafter.

The expansion addresses a supply problem Peirce identified directly: few traditional permitted custodians currently offer robust services across a substantial range of crypto assets. Some may not serve a particular asset at all, while others may lack the technical expertise required to safeguard it.

Broader Custody Amendments

Crypto dominates the proposal, but the amendments reach further. They would adjust when regulated funds may use broker-dealers as custodians. The proposal would exclude authorized discretionary trading from the Advisers Act custody rule in certain cases, with conditions limiting executions to designated client accounts and prohibiting transfers to accounts controlled by the adviser or related persons.

The amendments would also create an exception to independent verification for an adviser that has custody solely because of a standing letter of authorization.

All of these changes require a final rule. If adopted, registered advisers and regulated funds would gain a clearer path to holding crypto, but the adviser-held option would remain tethered to a quarterly search for a permitted custodian. The 60-day comment window opens once the proposal is published in the Federal Register, giving custody providers, state banking authorities, and asset managers their first formal opportunity to shape the final text.