SEC Proposes New Crypto Custody Rules for Advisers and Regulated Funds

29 October 2026

On October 1, 2026, the Securities and Exchange Commission (SEC) unveiled a sweeping proposal to update the regulations governing how registered investment advisers and regulated funds may custody crypto assets. The new framework, if implemented, would carve out two novel exceptions to the general requirement that investment advisers must entrust client assets to a "qualified custodian" — the provisions for self-custody and for using state trust companies as crypto custodians.

The proposal comes as part of the SEC's broader campaign to modernize the regulatory treatment of digital assets. And while the agency insists that it remains committed to the core custody principles of segregation and proper controls, it concedes that custody mechanisms have necessarily evolved in the face of distributed ledger technology. The new rules, the SEC argues, are designed to preserve investor protections like independent custody and review while reflecting current market practices and evolving digital asset mechanics.

Under the proposed regime, investment advisers and regulated funds would be permitted to provide custody for crypto assets in their own name, in certain specific circumstances. But that self-custody path would be highly circumscribed. An adviser would have to write out why they've diligently searched but can't persuade a "qualified custodian" to hold the crypto assets. They would need demonstrable expertise to safeguard those assets. And they would need formal protocols in place to fend off loss, theft, misuse, and misappropriation. "It requires the adviser to determine, in writing, which crypto assets meet those conditions, both on an initial and at least quarterly basis," regulator Gary Gensler told Reuters.

The alternative option would be for investment advisers and regulated funds to rely on state trust companies as crypto custodians — provided the custodian can present evidence of authorization from the relevant state banking authority and commit to certain safeguarding practices. The proposal would also tighten recordkeeping and reporting on custody assets and would fine-tune the definition of a "qualified custodian." More generally, the proposal would renew the SEC's regulation of custody of digital assets and would provide further regulatory clarity in the area.

The cryptocurrency sector, still seeking a foothold in the traditionally cautious investment fund world, could see a real boost if the SEC's proposed custody framework is issued in a final form. The concerns of conflicts of interest and custody risk that have discouraged firms from adding digital assets to their portfolios could hopefully be mitigated. The crypto custody providers, even outside the self-custody framework, might benefit from their inclusion as a potential custodial option.

But not all reactions were positive. Elected representatives from both major parties raised concerns about how the new proposal might be overly prescriptive in its safeguarding requirements, or under-prescriptive in structural questions surrounding qualified custody. Skeptics also argue that the proposal does not adequately address how the fund could satisfy its fiduciary duties to both report and request access to audited financial statements and internal control reports from state trust company custodians for a particular type of asset. Early reactions on those and other substantive issues, pending while the SEC seeks public comment on the proposal released on October 6, 2026.