Welcome to the third roundtable of the Crypto Task Force, where our focus today is on digital asset custody—a foundational element in building trust, security, and compliance within the evolving crypto ecosystem.
As financial institutions and regulated entities increasingly integrate crypto assets into their service offerings, the need for clear, flexible, and secure custodial solutions has never been more urgent. The principles governing asset protection under federal securities laws remain unchanged: safeguarding client assets is paramount. But with crypto, new technological and regulatory dimensions come into play.
👉 Discover how compliant custody models are shaping the future of digital finance.
The Evolving Landscape of Crypto Custody
For years, one of the biggest hurdles for financial firms looking to offer crypto custody was uncertainty around accounting treatment. That changed recently when the Office of the Chief Accountant withdrew Staff Accounting Bulletin No. 121 (SAB 121)—a move that significantly lowered the barrier for banks and trust companies seeking to provide crypto custodial services.
While this development opens new doors, it’s only one piece of a larger puzzle. True market growth depends on regulatory clarity, competitive choice, and interoperability across custodial frameworks. Today, federally chartered banks can custody crypto assets under the authority of the Office of the Comptroller of the Currency (OCC), which has issued interpretive letters affirming that national banks may act as fiduciaries in holding digital assets.
But what about state-chartered institutions?
Bridging the Gap: State-Chartered Trust Companies and Fiduciary Authority
State-chartered limited-purpose trust companies—such as those authorized by regulators like the New York State Department of Financial Services (NYDFS) or the California Department of Financial Protection and Innovation (DFPI)—are already equipped to operate with fiduciary responsibilities. These entities arguably exercise powers “similar to those permitted to national banks,” especially when acting under state banking charters that explicitly authorize digital asset custody.
Yet ambiguity remains: Can registered investment advisers (RIAs) rely on these state-level trust companies as qualified custodians under Rule 206(4)-2 of the Investment Advisers Act—the so-called "Custody Rule"?
Currently, many advisers assume they must treat all crypto holdings as either securities or funds, requiring them to use only narrowly defined custodians. This over-application limits innovation and restricts access to emerging investment opportunities in decentralized finance (DeFi), staking, and other yield-generating activities incompatible with traditional custodial arrangements.
👉 Explore next-generation custody solutions built for the digital asset era.
Clarifying “Funds” and Expanding Custodial Options
A critical gap lies in the definition—or lack thereof—of the term “funds” within the Custody Rule. While the prior administration suggested that “most crypto assets” are likely funds or securities, the term “funds” itself is not defined in Rule 206(4)-2. This regulatory silence creates confusion and forces advisers into overly conservative positions.
If a crypto asset isn’t a security, should it automatically be classified as a “fund”? Without clarity, firms err on the side of caution, funneling all client crypto into qualified custody structures—even when unnecessary or impractical.
Commissioner Peirce and others have rightly pointed out that a large number of crypto assets are not securities, and by extension, may not fall under existing fund or custody mandates. The Commission should consider clarifying whether—and under what conditions—certain crypto assets constitute “funds” for purposes of the rule.
This clarification would empower advisers to make nuanced decisions based on asset type, risk profile, and client objectives—rather than defaulting to one-size-fits-all compliance models.
Enhancing Competition Through Regulatory Reform
To foster innovation and competition, the Commission could take several forward-looking steps:
- Reevaluate the special purpose broker-dealer regime: Originally designed to accommodate digital asset securities custody, this framework may now limit rather than enable progress. A sunset or modernization of this regime could encourage broader participation from established financial institutions.
- Issue interim guidance: Clear guidance on how firms can simultaneously custody non-security crypto assets, crypto asset securities, and traditional securities would reduce uncertainty and promote compliance. Such guidance should address capital requirements, customer protection rules (e.g., Rule 15c3-3), and operational safeguards.
- Codify best practices into rule amendments: Once tested through market practice and feedback, this guidance should be formalized into updated regulations that reflect today’s realities—not yesterday’s assumptions.
These actions would not only strengthen investor protection but also level the playing field for both incumbents and innovators.
👉 Learn how regulatory clarity is accelerating institutional adoption of crypto.
Frequently Asked Questions (FAQ)
Q: What is the Custody Rule under the Advisers Act?
A: Rule 206(4)-2 requires registered investment advisers to safeguard client assets by using qualified custodians—such as banks, broker-dealers, or trust companies—for holding funds and securities. The rule aims to prevent fraud and ensure independent verification of client balances.
Q: Can state-chartered trust companies be qualified custodians for crypto assets?
A: While federally chartered banks have received explicit approval from the OCC to custody crypto as fiduciaries, the status of state-chartered limited-purpose trust companies remains unclear under SEC rules. Regulatory clarification is needed to confirm their eligibility.
Q: Why does SAB 121 matter for crypto custody?
A: SAB 121 required banks to record custodied crypto assets as liabilities on their balance sheets—a major deterrent due to capital implications. Its withdrawal removes a key obstacle, encouraging more financial institutions to enter the custody space.
Q: Are most crypto assets considered securities?
A: No. While some tokens meet the definition of a security under U.S. law (e.g., via the Howey Test), many others function as utility tokens, governance tokens, or mediums of exchange—and do not qualify as securities. Regulatory overreach in this area can stifle innovation.
Q: What are non-security crypto assets?
A: These include cryptocurrencies like Bitcoin and Ethereum (when not offered as investment contracts), stablecoins used for payments, NFTs with non-financial utility, and tokens used within decentralized protocols for access or voting rights.
Q: How can clearer rules boost investor protection?
A: Paradoxically, overly restrictive or ambiguous rules reduce protection by pushing activity into unregulated spaces. Clear, risk-based regulations encourage responsible innovation while keeping assets within auditable, compliant frameworks.
The path forward requires collaboration between regulators, financial institutions, and technology providers. By modernizing outdated frameworks, clarifying undefined terms, and embracing technological neutrality, we can build a custody ecosystem that supports security, competition, and choice.
Thank you to the Crypto Task Force and all panelists for your dedication to advancing this critical dialogue. The work we do today will shape how investors interact with digital assets for years to come.