SEC proposes conditional self-custody for crypto funds

The SEC on Oct. 1 proposed rules that would let registered investment advisers and regulated funds self-custody some crypto, subject to new safeguards, according to the Commission’s announcement of the proposal. The change would offer a route for assets that a qualified custodian is unavailable to hold, while also allowing state trust companies to serve as custodians under conditions.

The proposal is not in force. It covers registered advisers and regulated funds, including registered investment companies and business development companies; it does not give investors a new right to hold their own keys through a fund. The SEC’s proposed custody rules would require an adviser seeking to self-custody client crypto to determine and document at the outset, and at least quarterly, that a qualified custodian is unavailable.

When could an adviser hold the keys itself?

Only when the adviser meets the proposed conditions, including having expertise safeguarding the asset and systems to protect it against loss, theft, misuse and misappropriation. Those systems would need to manage private keys, require at least two people to authorize transfers and keep each client’s crypto in separately designated blockchain addresses.

The SEC would not prescribe specific technical methods for key management. That leaves advisers room to adapt controls to their systems, but also makes the quality of those controls central to whether self-custody is safe. Advisers would have to review their safeguards and cybersecurity controls annually and obtain an annual internal-control report from an independent public accountant.

Who oversees a fund’s self-custody arrangement?

For regulated funds, the board would designate the adviser employees allowed to access key materials and oversee the custody arrangement. The adviser would still have to meet the proposed safeguards, while the board would review information about the arrangement. That adds a governance check beyond the adviser’s own procedures; it does not put the keys in an independent custodian’s hands.

The trade-off is between access and separation of duties. Self-custody could give funds a path to hold crypto when no qualified custodian is available; a state trust company or another qualified custodian would keep custody with a separate provider, where one is available. The SEC is seeking comments for 60 days after publication of the proposal in the Federal Register. The comment record and any final rule will show whether the board’s role, accountant reporting and flexible technical standards are considered sufficient safeguards.