SEC Moves Ahead with New Crypto Custody Rules for Funds

The SEC is moving ahead on crypto custody while Congress is still stuck over the wider US market structure. Its October 1 proposal covers how registered investment advisers and regulated funds may hold crypto under existing law. The Clarity Act, which would set a broader division of authority between the SEC and CFTC, remains blocked in the Senate.

This is not a new crypto market structure. It is a narrower attempt to give advisers and funds a workable custody route while the broader bill remains unresolved.

What the SEC Can Do Without Congress

The SEC is using the Investment Advisers Act of 1940 and the Investment Company Act of 1940 to propose new custody rules. It does not need a new act from Congress to issue them.

The proposal would allow self-custody in certain circumstances and permit state trust companies to act as custodians. Under Commissioner Hester Peirce's description, advisers would have to determine before taking custody, and then every quarter, that no permitted custodian is available.

Self-custody would still come with safeguards. These include cybersecurity protections, annual reviews, internal reporting, account statements and disclosures to clients.

The public comment period will run for 60 days from Federal Register publication. The release, numbered IA-7023 and IC-36353, is still a proposal, not a final rule.

Why Custody Was the Bottleneck

Traditional custody rules depend on qualified custodians, but the SEC's proposing release notes that few traditional providers offer robust custody services across a substantial range of crypto assets. That has left advisers and regulated funds with limited options for holding an asset class that clients increasingly want to access.

Chair Paul Atkins framed the proposal as closing that gap. The SEC also says it could give regulated funds more scope to offer crypto-related investment strategies.

For investors, the practical change is who may hold the assets. It is not a new guarantee that an adviser can offer any token. The proposal's custody amendments would generally apply only to crypto assets that qualify as funds or securities, or as securities or similar investments held by regulated funds. Most non-security tokens would remain outside those amendments.

That distinction matters if you follow accounts arguing that the proposal settles the status of every token. It does not.

What Remains Trapped in Congress

The Clarity Act was intended to set a broader framework for crypto, split oversight between the SEC and CFTC, establish registration requirements and strengthen anti-money laundering protections.

On September 15, the Senate voted 50 to 49 against advancing the bill. Sixty votes were needed to clear the procedural hurdle. A revised version had added ethics restrictions involving public officials, but those changes did not secure enough support.

The disagreement centered in part on ethics concerns involving crypto profits by President Donald Trump and his family. Sen. Ruben Gallego, a leading Democratic negotiator, said those concerns remained unresolved.

The failure mattered to the market. Bitcoin fell about 3% on the day of the vote, while shares in Coinbase fell 8% and Circle fell 10%.

The SEC's move shows how regulators can continue filling individual gaps while Congress debates the larger framework. Chair Atkins has tied the custody proposal to earlier work on tokenization, broker-dealer registration and a proposed offering regime for certain crypto investment contracts. He also said more proposals are coming.

What Changes for Token Listings and Enforcement

The custody proposal does not directly settle which tokens exchanges may list. Its more immediate effect would be on the regulated entities that hold or advise on crypto assets, including their choice between a qualified custodian, a state trust company and limited self-custody.

That could expand the legal options available to regulated funds. It could also increase competition among custody providers, although the SEC proposal does not guarantee lower fees or a particular outcome.

For enforcement, the SEC would retain its existing authority while the broader question of how securities and commodities rules should overlap remains for Congress. The split is now visible: the SEC is defining custody under its existing statutes, while market structure legislation is still waiting for a workable balance in Congress.

For now, the clearest signal is procedural. The SEC has started a 60-day consultation on custody. The bill that could have mapped the wider US crypto market has not cleared its first Senate hurdle.