The Quarterly Check Behind the Self-Custody Framework
The SEC proposed new crypto custody rules on October 1 allowing investment advisers to hold client assets directly, but the framework carries procedural requirements that most coverage has glossed over. Advisers seeking self-custody of crypto must prove every 90 days that no qualified custodian is available and transfer assets once one appears.
The SEC crypto custody proposal amends decades-old requirements under the Investment Advisers Act of 1940 and Investment Company Act of 1940, rules that Chairman Paul Atkins acknowledged "have not kept pace" with digital assets' growth. The framework permits self-custody only when advisers determine quarterly that no permitted custodian exists. This makes it a conditional fallback rather than an open option.
Commissioner Hester Peirce described advisers as "gritting their teeth and holding on for dear life" while waiting for workable rules. The Digital Chamber noted in May 2025 that some advisers were declining token allocations entirely. Others asked portfolio companies to retain assets until SEC crypto custody solutions became available.
Dual Authorization and Annual Audits Required
Advisers who qualify for self-custody must implement dual-approval controls, with transfers requiring authorization by at least two people. Each investor's holdings must occupy separate blockchain addresses to prevent commingling. Within six months of taking custody, advisers must obtain an independent accountant's internal control report, with annual renewals thereafter.
The proposal also expands the custodian pool beyond banks and broker-dealers. State-chartered trust companies can now serve as crypto custodians if they demonstrate state authorization, asset safeguarding procedures, audited financials, and segregated client holdings. This addresses gaps where qualified custodians previously did not exist for certain digital assets.
Legislative Failure Prompted Regulatory Action
The proposal follows the Senate's failure to pass the Clarity Act, which the crypto industry spent $8 million lobbying for before it lost 49-50. After that legislative defeat, both the SEC and CFTC accelerated regulatory efforts. The SEC released an innovation exemption while the CFTC filed crypto rulemaking with the White House.
The timing reflects a broader pattern where Congress failed on crypto regulation and agencies moved ahead with administrative frameworks. Atkins has reshaped crypto policy at the SEC since taking the chair, with this custody proposal representing one of the more detailed rule changes under his tenure.
The SEC will accept public comments for 60 days following publication in the Federal Register. The quarterly reassessment requirement positions the SEC crypto custody framework as a temporary fallback rather than a permanent primary option, marking a measured approach to expanding institutional access.