WASHINGTON D.C. — The Securities and Exchange Commission proposed new rules and amendments to provide a tailored framework for the custody of crypto assets for registered investment advisers and regulated funds. The proposal applies to registered investment advisers and regulated funds, including registered investment companies and business development companies.

SEC Chairman Paul S. Atkins said the market has evolved since Bitcoin emerged in 2008. “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.” He added that existing regulations have failed to adapt to this growth. “Unfortunately, our rules and regulations have not kept pace.”

The proposed rules would permit crypto assets to be held in self-custody under certain circumstances. Investment advisers may hold crypto assets themselves only if they conduct quarterly reviews to ensure no qualified custodian is available. The proposal would also allow state trust companies to serve as custodians for client and regulated fund crypto assets. Additionally, the proposal updates requirements relating to financial statement audits for registered investment advisers and broker-dealer custodial services for regulated funds.

Atkins stated that the new rules aim to replace uncertainty with clarity. “To that end, today’s 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 the grey of uncertainty created by custody rules crafted for a bygone era.” The public comment period will remain open for 60 days following the publication of the proposing release in the Federal Register.

Why It Matters

The proposal addresses a regulatory gap that has persisted as the crypto asset market expanded into a multi-trillion-dollar sector. By establishing specific custody standards under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, the SEC seeks to modernize frameworks that were originally designed for traditional securities. This move follows a 2023 effort by the agency to amend custody rules, marking a continued push to align investor protections with current market realities.

Timeline

The proposed rules and amendments are issued under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. The proposal updates requirements relating to financial statement audits for registered investment advisers and broker-dealer custodial services for regulated funds. The proposal would allow state trust companies to serve as custodians for client and regulated fund crypto assets. He added that to that end, today’s 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 the grey of uncertainty created by custody rules crafted for a bygone era.

What's New

In 2023, the SEC proposed amendments to the custody rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, marking a significant step toward modernizing regulatory frameworks for crypto assets. The Investment Company Act of 1940 was enacted alongside the Investment Advisers Act to regulate investment companies and address abuses like 'hot tips' and performance fees, as documented in historical SEC regulatory studies. The SEC was established in 1934 under the Securities Exchange Act to oversee securities markets, with its authority expanded over time to include regulating investment advisers and funds through statutes like the Investment Advisers Act of 1940. The Investment Advisers Act of 1940 was enacted to regulate investment advisers and require them to register with the SEC, with the primary goal of protecting investors from fraudulent and unethical practices. The Investment Company Act of 1940 was created to regulate investment companies, including mutual funds, to ensure transparency, protect investors, and promote fair practices in the securities market. The Investment Advisers Act of 1940 was influenced by the Public Utility Holding Company Act of 1935, which prompted the SEC to study investment trusts and uncover adviser abuses such as 'hot tips' and questionable performance fees. The SEC's proposal permits self-custody of crypto assets by investment advisers under limited circumstances, requiring advisers to conduct quarterly reviews to ensure no qualified custodian is available.