On October 1 local time, the U.S. Securities and Exchange Commission (SEC) proposed amendments to cryptoasset custody rules for registered investment advisers and regulated funds. The proposal would clarify custody requirements when using state-chartered trust companies and conditionally allow direct custody of assets for which no legally permitted custodian is available.
Before an adviser or fund places assets with a state-chartered trust company, it would have to verify the company’s authority to custody cryptoassets, security policies, audited financial statements and internal-control reports, and repeat the review annually. Client assets would have to be segregated from the trust company’s own assets.
To use direct custody, an adviser would have to make a prior written determination, asset by asset, that no qualified custodian is available and reconfirm that conclusion at least quarterly. High custody costs alone would not justify direct custody. If a qualified custodian capable of holding the asset becomes available, the adviser would have to transfer it as soon as reasonably practicable.
A transfer of directly held assets would require joint approval from at least two designated individuals. At least one must be a member of management and, for fund assets, an officer of the fund. Client assets would have to be held at segregated onchain addresses for each client, and the security framework would have to be reviewed annually. An internal-control report from an independent public accountant would also be required within six months after direct custody begins and annually thereafter.
A regulated fund could hold assets through an investment adviser that meets these requirements. Before custody begins, the fund’s board would review the adviser’s written determination that no custodian is available and its custody framework; thereafter, it would review the determination quarterly and the framework annually.
The proposal would also permit blockchain records to be used for legally required recordkeeping. The records would have to satisfy the required information and retention periods and, upon SEC request, be promptly produced in a human-readable and usable electronic format.
The comment period will run for 60 days after publication in the Federal Register. Whether the final rules will be adopted and when they would take effect have not yet been determined.