The U.S. Securities and Exchange Commission (SEC) has announced proposed rules to modernize the way investment advisers and regulated funds manage client assets, placing particular emphasis on the custody of cryptocurrencies.
SEC’s approach to digital asset custody
In its statement, the SEC revealed that advisers and regulated funds may be permitted to hold digital assets on behalf of clients directly, but only when a qualified custodian is not available. This policy aims to bring the supervision of crypto assets in line with traditional financial products, while acknowledging the fast-paced changes in the digital asset sector.
The commission clarified that records managed on a blockchain can fulfill certain compliance requirements, provided that these records meet specific standards established in the proposal. Additionally, the proposed rules would authorize the use of state trust companies as custodians for regulated fund and client crypto assets, contingent upon meeting the necessary regulatory conditions.
Mini dictionary: State trust companies, serve as regulated financial institutions authorized to act as custodians and fiduciaries, including holding digital assets under certain legal frameworks.
Legislation hurdles and regulatory response
The regulatory update follows the failure of the Clarity Act to progress in the U.S. Senate last month. This anticipated piece of legislation aimed to define the boundaries between digital assets classified as securities, commodities, or payment-focused stablecoins. However, it did not receive enough votes to advance toward becoming law.
Despite these legislative challenges, the SEC reiterated its commitment to clarifying and enforcing the regulatory landscape for cryptocurrencies. Prior to the procedural vote, the commission submitted its crypto custody proposal to the White House, reflecting a proactive stance regardless of lawmakers’ progress on broader digital asset law.
Statements from the SEC Chair
SEC Chairman Paul S. Atkins commented on the growth and complexity of the crypto market, noting the gap between regulatory frameworks and the rapid advancement of digital assets. Atkins emphasized the need for updated policies that reflect the realities of the industry.
Since the advent of Bitcoin in 2008, the crypto asset market has grown from a niche curiosity into a multi-trillion-dollar asset class to which investors actively seek exposure. Unfortunately, our rules and regulations have not kept pace.
Atkins added that the latest proposal would provide a defined regulatory path for advisers and funds to custody crypto assets, intending to replace outdated and unclear previous guidelines. He further reiterated his aim to advance the U.S. as a leading global hub for cryptocurrency, regardless of the status of comprehensive legislation.
Today’s proposal would provide a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before — and replacing the grey of uncertainty created by custody rules crafted for a bygone era.
Ongoing regulatory efforts
The SEC continues to drive rulemaking in the digital asset space despite legislative delays. Its latest initiative highlights the regulator’s intention to ensure clearer, updated standards for entities operating in the crypto sector, especially regarding the custody and safeguarding of digital assets.
Investment advisers and funds are encouraged to review the SEC’s proposal and prepare for potential shifts in compliance requirements as oversight of cryptocurrencies becomes more defined in the future.
