SEC Says State Trust Companies Can Custody Crypto

In my recent YouTube video, I discuss how the SEC is beginning to align its custody framework for digital assets with industry practice. The SEC’s Division of Investment Management has issued a no-action letter confirming that certain state-chartered trust companies may serve as qualified custodians for digital assets and related cash equivalents under the Investment Advisers Act and the Investment Company Act.

This means that registered investment advisers and funds can now custody crypto assets with eligible state trust companies, entities the SEC staff is now willing to treat as “banks” for custody purposes. Under the Advisers Act’s custody rule and related provisions of the 1940 Act, client funds and securities must be maintained with a qualified custodian, generally defined as a bank or broker-dealer. Until now, whether a state trust company could meet that definition was uncertain.

This no-action relief resolves that question, at least for entities that meet rigorous operational, oversight, and reporting standards. The SEC’s letter conditions relief on extensive due diligence and investor protection safeguards, including:

1. Initial and annual assessments of the trust company’s custodial capabilities;

2. Policies reasonably designed to safeguard crypto assets;

3. Audited financials and SOC-1 or equivalent control reports;

4. Full risk disclosure to clients or fund boards; and

5. Written custody agreements that prohibit rehypothecation and require segregation of client assets.

Enjoy the video below for a complete analysis.