The U.S. Securities and Exchange Commission proposed a tailored crypto custody framework for registered investment advisers, registered investment companies and business development companies. The proposal would permit advisers to self-custody client crypto assets when no permitted custodian is available and allow advisers and regulated funds to use state trust companies as custodians, creating new pathways for crypto investment strategies under the Investment Advisers Act and Investment Company Act. It advances the SEC’s broader effort to modernize securities regulation for crypto assets. Before using self-custody, an adviser would have to determine initially and quarterly that no permitted custodian will maintain the asset. The adviser would also need safeguarding expertise and systems covering private key management, authorization by at least two people, client-level asset segregation and cybersecurity, alongside annual reviews, independent internal control reports and quarterly client statements. A regulated fund’s board would oversee the arrangement. State trust company custody would require initial and annual due diligence on authorization and safeguarding controls, review of audited financial statements and internal control reports, and segregation of client and fund assets from the custodian’s proprietary assets. The package would also modernize traditional custody requirements, including broker-dealer custody for regulated funds, adviser audit provisions and exceptions involving discretionary trading authority, standing letters of authorization and inadvertent custody, while adding related disclosure and recordkeeping requirements.

Original source