SEC Revives Crypto Custody Rule as U.S. Regulators Revisit Digital Asset Safeguarding

The U.S. Securities and Exchange Commission (SEC) is taking another step toward updating how investment advisers safeguard client assets, including cryptocurrencies, after its previous attempt under former Chair Gary Gensler failed to become final.

The SEC has now sent the early-stage custody rulemaking concept to the White House Office of Management and Budget (OMB) for review. While the agency has revealed few details about the proposal, its regulatory agenda indicates that the new effort would modernize custody requirements for investment adviser clients and fund assets while specifically addressing crypto assets.

The development comes as the SEC under Chairman Paul Atkins takes a more crypto-friendly approach to digital asset regulation.

SEC Reopens Crypto Custody Debate

The SEC's latest initiative focuses on the rules governing where investment advisers can hold client assets.

According to the agency's regulatory agenda, the proposal would seek to "improve and modernize" custody regulations while addressing crypto assets. It would also remove certain outdated requirements that may no longer be necessary as financial markets and asset holding practices evolve.

For crypto firms and investment advisers, the most important question is what the new custody framework will actually require.

The SEC has not yet provided enough detail to determine how broadly the proposal would apply or which institutions could ultimately qualify to safeguard crypto assets.

That uncertainty is particularly important because the agency's previous attempt generated significant opposition.

What Happened to the SEC's 2023 Custody Proposal?

In 2023, the SEC proposed expanding its investment adviser custody framework to cover a broader range of client assets, including cryptocurrencies.

Under the proposal, advisers would generally have needed to place client crypto assets with qualified custodians. These could include certain banks and trust companies, SEC registered broker dealers and futures commission merchants overseen by the Commodity Futures Trading Commission.

The approach faced criticism from across the financial and crypto industries.

The Small Business Administration's senior lawyers warned that the proposal could have disproportionately affected smaller investment advisers, while venture firm a16z described the proposal as "illegal, infeasible, and dangerous."

The proposal ultimately failed to receive final approval before Gensler left the SEC and was later withdrawn.

A Different Regulatory Environment for Crypto

The SEC is now approaching crypto custody in a significantly different regulatory environment.

Paul Atkins has made clearer and more accommodating cryptocurrency regulation a major focus of his tenure. The agency has also moved forward with broader efforts to establish a clearer regulatory framework for digital assets.

The SEC recently introduced its "Regulation Crypto Assets" proposal, while other initiatives are aimed at areas including broker dealer compliance and securities tokenization.

That tokenization push could become particularly relevant to the custody debate as financial institutions increasingly explore bringing traditional assets onto blockchains.

Coinbase Tokenized Stocks Go Live on Base With Chainlink Price Feeds examined the expansion of tokenized equities onchain and their integration with decentralized finance. As more traditional financial assets move onto blockchain infrastructure, clear rules around how those assets are held and safeguarded become increasingly important.

Crypto Custody Has Changed Since 2023

The industry itself has also evolved since the SEC's previous proposal.

The crypto sector has seen a surge in federal trust bank charters, creating more institutions capable of handling digital assets. That could give regulators a broader pool of potential custodians compared with the environment that existed when the SEC introduced its earlier proposal.

Still, the central issue remains unresolved: where and how can investment advisers safely hold crypto assets while meeting federal custody requirements?

A new SEC proposal could provide more clarity, but its eventual impact will depend heavily on the specific requirements the agency puts forward.

When Could the New Custody Rule Arrive?

The SEC's regulatory agenda points to October as a potential timeline for the custody proposal.

However, regulatory timelines are not guaranteed. The SEC has previously missed projected dates for other crypto related initiatives, meaning the custody proposal could arrive later than currently anticipated.

For now, the move to OMB represents an early step rather than a finalized rule.

The next major milestone will be the SEC's formal proposal, which should reveal whether the agency is taking a substantially different approach from the 2023 custody framework.

For the crypto industry, that proposal could become an important test of how the SEC's new regulatory philosophy translates into practical rules for digital asset custody.