SEC Opens Door for State Trusts as Crypto Custodians

Key Highlights

  • U.S. SEC will now allow investment advisers to use qualified state-chartered trust companies to custody crypto assets
  • However, this new policy update requires state trusts to comply with strict operational standards
  • This decision is expected to attract institutional capital by giving investment advisers a way to access crypto

On September 30, the U.S. Securities and Exchange Commission (SEC) announced that investment advisers are now permitted to custody cryptocurrency assets with state-chartered trust companies. 

This decision will break a long-standing block that has prevented large-scale institutional money from flowing freely into the crypto market.

SEC’s Change in Its Cryptocurrency Regulatory Stance

In the past, a rule known as the “Custody Rule” has required investment advisers to hold client assets with “qualified custodians.” These are typically large, federally regulated banks. 

However, the huge majority of these traditional banks have been hesitant to offer deep crypto custody services as they view the asset class as too new and too risky. They also cited its volatile nature that could trigger financial instability.

This has created a major hurdle. Financial advisers who wanted to invest in Bitcoin or Ethereum for their clients had very few approved places to safely hold those assets. 

But now, the SEC’s new guidance directly addresses this problem by clarifying that state-chartered trusts can qualify as custodians, provided they meet specific standards.

In the official statement, the staff of the Securities and Exchange Commission has provided a very important assurance to the industry. They have confirmed that they will not advise the Commission to take enforcement action against investment advisers who use qualifying state-chartered trust companies as custodians for crypto assets. They will effectively treat them as they would traditional banks.

However, there are some criteria to qualify as a custodian for crypto assets. In which investment advisers must go through an ongoing verification process to ensure that their chosen state trust company is fully qualified. This due diligence is not a one-time event but an annual requirement. 

The first step is to formally confirm that the trust company holds a valid license from its state banking authority, specifically for the custody of crypto assets. This official charter will be the proof of its legal right to operate.

SEC Updates Custodian Rules for Crypto

This policy change did not come out of the blue. It is the outcome of the SEC’s ongoing effort to modernize its rules for the digital age. One of the main parts of this was the 2023 proposal for a new “Safeguarding Rule.” 

While that proposal was expected to enhance protection for all client assets, it also raised concerns within the crypto industry that it might make it even harder to use existing crypto platforms. 

The SEC’s latest action can be seen as a practical response. By officially recognizing state trust companies, the regulator is creating a viable, regulated solution for institutions to engage with crypto without compromising on security.

The decision validates the business models of companies that have been preparing for this moment. State-chartered trust entities like Coinbase Custody Trust Company in New York and Anchorage Digital Bank have already been operating under strict state-level banking regulations. 

They have built sophisticated systems to securely store digital assets like Bitcoin and Ethereum. It shows that they can provide the level of safety that the SEC requires. This announcement officially brings them into the place as approved partners for the investment advisory world.

The SEC’s decision is also being watched closely on the international stage. As global financial regulators work to create standards for the borderless crypto industry, the actions of a major market like the United States carry immense weight. 

The European Union, with its recently passed MiCA framework, has already established its own set of custody rules for crypto assets. 

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