U.S. Securities and Exchange Commission staff grants no-action relief for crypto custody with certain state trust companies

The U.S. Securities and Exchange Commission’s Division of Investment Management staff issued a no-action letter stating it would not recommend enforcement action against registered investment advisers or regulated funds that maintain crypto assets and related cash and cash equivalents with certain state-chartered financial institutions known as State Trust Companies. The letter is intended to address uncertainty over whether these entities meet the definition of a “bank” under the custody provisions of the Investment Advisers Act of 1940 and the Investment Company Act of 1940. The staff position does not expand the definition of a permissible custodian and is framed as applying to State Trust Companies operating within a regulatory framework that ensures investor protection and is similar in material respects to the frameworks applicable to other permissible custodians. Scope is limited to client crypto assets held by registered advisers, or crypto asset investments of regulated funds, that are subject to the relevant custody provisions, and includes tokenized equity or debt securities formatted as crypto assets on a crypto network; advisers and funds may continue to custody with other permissible custodians, including national banks and state banks, without regard to the letter. In a related statement, Commissioner Hester M. Peirce pointed to the no-action letter as clarifying a regulatory “gray zone” and as an opportunity to consider whether custody requirements for registered advisers and regulated funds should be improved and modernized, including through principles-based rules.