The US Securities and Exchange Commission has proposed amendments to its investment adviser custody framework that would, for the first time, explicitly address how registered investment advisers and funds must safeguard crypto assets held on behalf of clients. If adopted, the measure would extend the qualified custodian requirements that govern traditional securities to digital assets.

What the Proposal Would Change

According to an SEC press release, the proposed amendments target Rule 206(4)-2 under the Investment Advisers Act, the statute's safeguarding provision commonly known as the Custody Rule. Its central requirement would obligate registered investment advisers to maintain client crypto assets with a "qualified custodian," applying the safeguarding logic that already governs traditional securities to digital asset holdings. The rule was substantially amended in 2009, after Bernard Madoff's Ponzi scheme showed how his advisory firm had acted as its own custodian for client accounts.

Under the existing rule, custody requirements have focused primarily on funds and securities. The proposal broadens that scope to cover virtually all client assets an adviser has custody of. That means crypto held in adviser-controlled wallets or left on exchanges without a qualifying custodial arrangement could fall outside compliance under the new framework.

The proposal, put forward on February 15, 2023, was published in the Federal Register under the title "Safeguarding Advisory Client Assets," a framing that positions the measure as investor protection rather than a targeted crypto enforcement action. Under the proposal, advisers would need to verify that any custodian holding crypto assets meets specific legal and operational standards, including segregation of client assets and protections in the event of custodian insolvency. That insolvency focus carries recent precedent: when crypto exchange FTX filed for bankruptcy in November 2022, customer assets held on the platform were drawn into the estate, leaving account holders to pursue recoveries as unsecured creditors.

Why the Proposal Matters for Advisers, Funds, and Custodians

For registered investment advisers already holding, or planning to hold, crypto on behalf of clients, the proposal triggers a review of custody arrangements — particularly private key control. At the center of that review is a basic question: who actually controls the private keys? An adviser that maintains direct control of private keys, rather than delegating custody to a qualifying third party, may not satisfy the proposed framework.

Funds with digital asset exposure face similar pressure to assess whether their current custodians, including crypto-native custodians and certain exchanges, would qualify under the amended rule. In a dissenting statement, Commissioner Hester Peirce raised substantive questions about whether existing crypto custodians could realistically meet the qualifying standards, and whether the SEC was overstepping the boundaries of its statutory authority under the Advisers Act.

Crypto custodians seeking to serve SEC-registered clients would need to demonstrate they meet qualified custodian criteria — a threshold historically met by banks, broker-dealers, futures commission merchants, but not necessarily by crypto-native custodial infrastructure. That leaves a structural gap the proposal does not fully resolve in its initial form, which is precisely why the public comment period is a critical phase. The SEC's broader 2026 regulatory agenda indicates that custody frameworks remain an active area of rulemaking, with the Safeguarding proposal sitting at the foundation of that effort.

What Happens Next in the Rulemaking Process

As a proposed rule rather than a final rule, the "Safeguarding Advisory Client Assets" amendment follows the standard federal rulemaking sequence: publication in the Federal Register opens a formal public comment period, after which SEC staff review submissions, may revise the proposal, and ultimately recommend a final rule for a Commission vote. At any stage, the Commission can withdraw, substantially rewrite, or indefinitely defer the proposal.

Advisers and funds have two developments to watch in particular: whether the Commission finalizes qualified custodian criteria that crypto-native firms can realistically satisfy, and whether the final rule includes exemptions or transitional periods for existing digital asset custody arrangements. The SEC's concurrent review of crypto-adjacent fund structures suggests the custody question will not be resolved in isolation but as part of a wider regulatory architecture for institutional digital asset access.

Commissioner Peirce's dissent underscores that the rulemaking is contested at the Commission level itself, making the final outcome less predictable than a unanimous proposal would be. Advisers operating in this space should treat the proposal as a signal of regulatory direction rather than a finalized compliance obligation, and engage the comment process to help shape workable custody standards before any rule is adopted.