SEC No-Action Letter Creates Opening for More Firms to Serve as Crypto Custodians

The U.S. Securities and Exchange Commission said in a letter on Tuesday that it did not plan to take action against registered investment advisors, issuers of crypto funds, and other entities for using state-chartered trusts to hold digital assets.

The updated guidance, a response from the SEC’s Division of Investment Management to a query filed by lawyers representing financial advisors, creates a potential opening for a greater number of organizations to serve as custodians for these assets, including affiliates of prominent crypto-focused firms such as Coinbase and Ripple.

“Based upon….your letter, the Division of Investment Management would not recommend enforcement action….against a Registered Adviser or Regulated Fund for treating a State Trust Company as a ‘bank’ related to placement and maintenance of Crypto Assets and Related Cash and/or Cash Equivalents,” the SEC letter said, as long as certain criteria are met both by the advisor and the trust.

The SEC letter offers the latest shift from the SEC’s less forgiving approach to crypto under former Chair Gary Gensler, who sought to limit the types of organizations that could custody digital assets.

In July, current Chair Paul Adkins unveiled “Project Crypto, an SEC initiative to dramatically lower regulatory burdens for the crypto industry and to accelerate the integration of digital assets within the traditional U.S. economy.

The Investment Advisers Act of 1940 requires that advisors maintain client assets with a bank, trust or other qualified custodian holding national fiduciary duties. Crypto supporters have used this legislation to enable a wider range of crypto initiatives.

The letter is not a formal rule or regulation and therefore has “no legal force or effect” or “alter or amend applicable law,” the SEC noted.

But the agency made advisors responsible for ensuring that a registered trust is authorized by relevant banking authorities to provide crypto custody services and has written policies and procedures to protect those assets, addressing such issues as private key management.

Custodial agreements that advisors sign should also ensure that the trust will not lend or otherwise use funds without a client’s consent, and that crypto assets “will be segregated from the State Trust Company’s assets.”

Trusts may serve as custodians, provided “the Registered Adviser determines that the use of the State Trust Company’s custody services is in the best interest of the RIA Client or Regulated Fund and its shareholders,” the SEC letter said.

The letter drew praise from Bloomberg ETF Analyst James Seyffart, who in an X post wrote it was “a textbook example of more clarity for the digital asset space.”

“Exactly the sort of thing the industry was asking for over the last few years,” he wrote. “And it keeps coming.”