The Securities and Exchange Commission proposed allowing registered investment advisers to self-custody clients' crypto assets when a qualified custodian is unable to hold them, unveiling the rule on Thursday in the wake of Congress's failure last month to pass the CLARITY Act.

The proposed amendments to the custody rule permit self-custody under a defined set of conditions. Advisers must determine that a "permitted custodian" cannot hold the asset, must reassess that finding quarterly, and must document "expertise" on safeguarding each crypto asset held in self-custody.

Additional requirements include annual cybersecurity reviews, private key management protocols, and joint authorization by at least two people for any transaction. Client statements must be issued at least quarterly.

What does the rule change?

The current framework requires advisers to custody client assets with a regulated qualified custodian—generally large institutions such as Charles Schwab and Fidelity.

SEC staff acknowledged in the proposal that even custodians offering digital-asset services "may not be able to support the large and continuously growing number of crypto assets in the market."

The rule would also let advisers and registered funds keep crypto with chartered state trust companies under specified conditions, and would amend discretion-related exemptions beyond the crypto context.

Why now?

The text mirrors the lighter-touch direction publicly favored by SEC Chair Paul Atkins and Commissioner Hester Peirce.

In a statement, Peirce—who is retiring from the agency—argued that a 2023 predecessor proposal "suggested that many advisors were already on the wrong side of the law" when navigating crypto custody.

She said she hoped the new draft "foreshadows that a calm end to the regulatory roller coaster ride is imminent."

Industry observers read the timeline as deliberate. Josh Burton, director of Silver Regulatory Associates, called the new rules "the culmination of years of work."

Burton added that custody has "long been the most challenging part of RIA compliance in crypto."

"For a long time, holding crypto assets with a qualified custodian was close to impossible for many managers," he said, "because so few qualified custodians actually existed by definition."

"Self-custody is often required for assets that qualified custodians don't support, or to use crypto's unique properties when participating in (decentralized finance) activities," Burton added.

Who supports and who opposes the proposal?

The Investment Adviser Association, a trade group representing RIAs, welcomed the changes. The group said the SEC is working to "make the unnecessarily complex and burdensome custody rule more workable and effective."

It argued that clearer custody guidance "is essential to the safekeeping of clients' crypto assets."

Better Markets, an investor-protection organization, attacked the proposal. Securities Policy Director Benjamin Schiffrin said there is "no reason for the SEC to endanger investors" by letting advisers hold client crypto assets.

He accused the agency of being "so beholden to the crypto industry, and so desperate to give the crypto industry everything it wants, that it is willing to throw out the regulatory framework that has long protected investors."

What's next?

The proposed rules will be open to public comment for 60 days after publication in the Federal Register. Burton cautioned that investor due diligence remains essential regardless of the rule's outcome.

"Most of the notable problems in crypto have come from preventable compliance failures that reasonable counterparty diligence could have identified," he said.

"Regulatory clarity won't remove the investor's responsibility to verify the claims and practices of asset managers, vendors and the underlying crypto investments," Burton added.

Advisers and trade groups will file comments during that window, with any final adoption contingent on the substance of those submissions.