SEC proposes crypto custody rules for advisers and funds

The U.S. Securities and Exchange Commission has proposed new rules governing how investment advisers and regulated funds hold client assets, with a focus on crypto assets.

Under the proposal, advisers and funds acting through their advisers would be allowed to hold client crypto themselves, but only where no permitted custodian is available, the regulator said in a statement issued on Thursday. The SEC also said records kept on a blockchain could count towards compliance, subject to conditions, and that it would permit the use of state trust companies as custodians for client and regulated fund crypto assets, again subject to conditions.

The proposal follows the failure of the Clarity Act, a framework for distinguishing between digital assets that are securities, commodities or payment stablecoins, which was blocked in a procedural vote last month. The SEC had said before that vote that it would begin regulating the crypto industry regardless of whether the landmark legislation passed, and had earlier sent a proposal to the White House aimed at clarifying the custody framework for investment advisers and companies.

“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,” SEC Chairman Paul S. Atkins said in a statement. He said the 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 what he called the grey of uncertainty created by custody rules crafted for a bygone era.

Mr Atkins, who is regarded as pro-crypto, said he would still work to make the U.S. the “crypto capital of the world” regardless of whether the landmark legislation got through. The measure remains a proposal rather than a final rule, and its provisions are subject to conditions set out by the regulator.