On October 1, 2026, the Securities and Exchange Commission proposed a new framework for crypto asset custody for registered investment advisers and regulated funds, including registered investment companies and business development companies. The proposal would permit adviser self-custody in limited circumstances and create a conditional route for using state trust companies as crypto custodians. It also addresses financial statement audits and broker-dealer custody for regulated funds.
For firms considering a new digital asset strategy, the proposal deserves attention before a product launches or a custody agreement is signed. It could expand the available options, but the conditions would require careful planning. The proposal has not been adopted, and firms cannot yet rely on its proposed permissions.
Why the SEC is revisiting crypto custody
In his statement accompanying the proposal, SEC Chairman Paul Atkins identified a practical problem: custodians can take months to support newly developed crypto assets. A manager may identify an investment opportunity before a permitted custodian has the systems to hold the asset. Rules built around traditional custody arrangements can therefore restrict the strategies that advisers and funds can offer.
The commercial significance is straightforward. A workable custody arrangement is part of making an investment strategy viable. Managers evaluating a token should assess custody availability alongside liquidity and investment risk. Discovering late in the process that an asset cannot be held through the intended structure can force changes to both the product and its economics.
Which assets and firms are covered
The SEC’s rulemaking overview distinguishes between registered advisers holding client crypto funds and securities and regulated investment companies holding crypto securities and similar investments. As Commissioner Hester Peirce explains, the proposal does not bring every crypto asset within the custody rules merely because it uses blockchain technology.
That distinction should shape the initial legal review. Firms should identify the entity providing advice, the type of client account, and the assets involved before deciding which custody provisions apply. Private fund managers should also distinguish the obligations of a registered adviser from those imposed on a regulated investment company. Those categories should not be treated as interchangeable.
Adviser self-custody would be conditional
The proposal uses “self-custody” to mean an adviser holding client assets, rather than an investor holding assets directly in a personal wallet. According to Peirce’s explanation, the adviser would first have to determine that no permitted custodian is available for the particular asset and repeat that determination quarterly.
The proposing release adds substantial safeguards. Among them are documented custody expertise, private key controls, transaction authorization by at least two people, separate client addresses, and annual reviews of safeguarding systems and cybersecurity controls. Advisers would also need internal control reports, quarterly client reporting, and a written agreement treating the assets as financial assets and the adviser as a securities intermediary under applicable state law. Regulated fund boards would have oversight responsibilities.
For a manager considering this route, we recommend evaluating the staffing and operational cost before assuming it will be commercially attractive. Who can approve a transfer? Who can recover access if an employee leaves? What evidence will demonstrate that the controls actually work? The answers should be reflected in procedures and contracts that the firm can follow in practice.
State trust companies would offer another custody route
The proposal would also permit eligible state trust companies to serve as crypto custodians. As Peirce describes, advisers and funds would need an initial and annual reasonable basis, after due inquiry, to believe the custodian has the relevant state authorization and appropriate safeguarding policies.
The proposing release would additionally require initial and annual review of the custodian’s audited financial statements and internal control reports. Client assets would have to be segregated from the custodian’s proprietary assets, with regulated funds obtaining contractual protection for that segregation.
This builds on the SEC staff’s September 2025 no-action letter concerning state trust companies, which provided conditional enforcement assurances. That letter expressly states that it is a staff position, has no legal force, and does not amend applicable law. The new proposal seeks to address custody through Commission rulemaking.
Our practical recommendation is to examine the actual custody agreement and supporting diligence materials together. The review should address control of the assets, any right to lend or pledge them, withdrawal restrictions, and the consequences of a service disruption. Marketing language about institutional custody should be checked against the rights the contract actually gives the client.
What firms should do now
Advisers, fund sponsors, and custody providers should use the proposal to test their planned arrangements. Identify which assets present custody gaps, assess the cost of meeting the proposed conditions, and prepare specific comments where those conditions would be difficult to implement.
The SEC’s rulemaking page states that comments are due 60 days after publication in the Federal Register. That deadline runs from Federal Register publication, rather than the October 1 press release. Firms should continue to evaluate current arrangements under applicable law and any relevant existing relief while monitoring the rulemaking.
At Kelman PLLC, we advise digital asset businesses on securities regulation and related legal structuring. If your business is evaluating a crypto investment strategy, a custody provider, or changes to its client agreements, contact our team to discuss the legal issues before implementation.
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