The US Securities and Exchange Commission (SEC) has proposed new crypto custody rules for investment advisers and regulated funds. Under the draft, asset managers could hold clients' crypto assets at state trust companies as a matter of course or, under narrow conditions, keep custody themselves.

The SEC oversees the US securities market, including investment advisers and regulated funds. Investment advisers are asset managers who invest money on behalf of their clients. Under the existing custody rule, they must place those assets with a qualified custodian such as a bank. That framework, however, rests on statutes dating from 1940 and was designed for traditional investments.

The agency published the proposal on October 1, 2026, under the Investment Advisers Act and the Investment Company Act, as outlined in the SEC's press release. SEC Chair Paul Atkins is behind the initiative, but the Commission must still formally adopt it. According to Atkins, the industry would for the first time receive a compliant custody path. The 60-day comment period begins only once the proposal appears in the Federal Register, so its end date remains open. Overall, the draft sets out two distinct routes.

Two Paths for Advisers and Funds

State trust companies form the default route. These are trust institutions chartered at the level of a US state, and several major US crypto custodians already operate under such charters. Before engaging one — and every year thereafter — the adviser must review the company. The adviser needs a reasonable basis to believe that the state banking regulator has authorized the company to provide crypto custody. In addition, the company must maintain written policies protecting crypto assets and cash against theft, loss, misuse, and misappropriation. The path is also open to regulated funds, meaning registered investment companies and business development companies.

Self-custody, by contrast, is permitted only as an exception. First, the adviser must determine that no eligible custodian is available for the specific crypto asset. It must then review that finding every quarter. The draft thus ties self-custody to a gap in the custodian market that the adviser must document on an ongoing basis.

Commissioner Hester Peirce clarified in statement what the proposal means by "self-custody." The term refers to an adviser acting as custodian of client assets. It does not cover investors who control their own crypto assets. For that reason, she said she would have preferred the term "shelf-custody."

"Regulators should zealously protect investors' right to self-custody and not attempt to force investors to custody their assets with someone else." — Hester Peirce, Commissioner, SEC

Why the Old Custody Rules Do Not Fit Crypto

Atkins justified the proposal by pointing to the age of the existing framework. In his words, many custody provisions under the two 1940 statutes — the Investment Advisers Act and the Investment Company Act — predate the internet. Since Bitcoin emerged in 2008, the crypto market has grown from a niche into a multi-trillion-dollar asset class. Investors increasingly want targeted exposure to this asset class, yet the custody rules their advisers follow were not built for such assets.

Atkins also described the practical problem in concrete terms. For newly developed crypto assets, custody infrastructure can lag the token's launch by many months. An adviser seeking to hold such a token for clients may therefore find no qualified custodian during that phase. The narrow self-custody exception is designed to close precisely this gap.

The proposal matters mainly for asset managers and hedge funds that want to hold Bitcoin directly rather than through exchange-traded funds (ETFs). Until now, the compliant route for many of them ran through an ETF whose issuer handles custody. Direct holdings could replace that detour in the future. Likewise, advisers could add newly launched crypto assets without waiting for a custodian to become available. The condition remains that no eligible custodian exists for the asset in question.

From Gensler's Safeguarding Draft to the Atkins Proposal

The proposal marks the provisional endpoint of a regulatory reversal spanning three years. In 2023, the SEC under then-Chair Gary Gensler proposed a broad safeguarding rule that would have effectively pulled crypto assets into the custody rule. Looking back, Peirce criticized that the draft implied many advisers were already breaking the rules and made compliant crypto custody look impossible. In June 2025, the SEC withdrew the draft. Almost all of the 13 other proposals withdrawn alongside it dated from the Gensler era.

Accounting created a second hurdle. From March 2022, Staff Accounting Bulletin 121 (SAB 121) required custodians to book crypto custody obligations as a liability and record a corresponding asset on the balance sheet. The treatment deterred banks from holding crypto assets for clients. Only in January 2025 did the SEC rescind the guidance with SAB 122, restoring the general standards ASC 450-20 and, respectively, IAS 37.

In September 2025, the SEC's Division of Investment Management followed with a no-action letter. Staff allowed advisers and registered funds to treat state trust companies as a "bank" under the custody provisions. Conditions included authorization by the state regulator, independent audit reports, segregated holdings, and no lending without client consent. This staff position, however, carried no legal force. Only the new proposal would anchor the trust-company path as a binding Commission rule.

SEC Acts Alone After the Clarity Act Fails

The political backdrop is a defeat in Congress. In September 2026, the Clarity Act failed a cloture vote in the Senate by 49 to 50, with 60 votes needed. All Democrats and independents present voted against it, as did four Republicans: Collins, Hawley, Moran, and Tillis. Tillis cast his no vote for procedural reasons, allowing him to file a motion to reconsider. Sticking points included open ethics provisions concerning the president's crypto gains. After the vote, Atkins announced that the SEC would act decisively within its statutory authority. With the legislative route blocked for the time being, SEC rulemaking is where the federal terms for institutional crypto custody are being defined.

Later that month, the SEC issued a five-year exemptive order for trading venues offering tokenized US stocks. Atkins additionally places the custody proposal alongside tokenization guidance, the classification of securities, and the proposed "Regulation Crypto Assets," and he has already announced further proposals.

The comment phase comes next. Market participants can submit comments for 60 days once the proposal appears in the Federal Register. As with any notice-and-comment rulemaking, the feedback gathered in this window can shape the final text. Only then will the Commission decide on the final rules. Until that point, the 2025 no-action letter remains the governing guidance for the trust-company path, and no withdrawal of that letter is known.

Source: Crypto Valley Journal