SEC Proposal Would Address How Investment Advisers and Funds Can Custody Crypto Assets Under the Federal Securities Laws

On February 15, 2023, the Securities and Exchange Commission (SEC) unveiled a proposal aimed at addressing the custody of crypto assets for registered investment advisers and regulated funds, such as investment companies and business development companies. This modernization of custody rules seeks to remove regulatory barriers that hinder advisers from providing crypto-related investment advice and expand investor choice by allowing regulated funds to offer clients access to a broader range of crypto asset-related investment strategies.

Commissioner Paul S. Atkins emphasized the growing importance of the crypto asset market, which has evolved from a niche curiosity into a multi-trillion-dollar asset class since the introduction of Bitcoin in 2008. The current regulatory framework has not kept pace with this growth, leaving investment advisers and funds without a clear path for compliant custody of crypto assets.

The SEC's proposal aims to rectify this issue by providing a tailored framework for the custody of these digital assets, modernizing requirements related to financial statement audits for registered investment advisers and broker-dealer custodial services for regulated funds.

Moreover, the proposal would permit crypto assets to be held in self-custody under specific circumstances and allow state trust companies to serve as custodians for client and regulated fund crypto assets. The public comment period on this proposal will remain open for 60 days following its publication in the Federal Register.