The SEC Takes 760 Pages to Answer One Question: Can a Fund Manager Hold Its Own Keys? Yes, Once It Proves Nobody Else Can

On October 1 the U.S. SEC voted to propose a 760-page crypto custody rule amending the Investment Advisers Act and Investment Company Act of 1940, drawing for the first time a compliant path for registered advisers and funds to hold crypto.

Three key facts

Self-custody opens with strings attached: an adviser may hold an asset itself only when no qualified custodian exists for it, must document that absence and reassess it quarterly, needs two authorized individuals to approve any transfer, and regulated funds must add board oversight. Commissioner Hester Peirce clarified that self-custody here means the adviser acts as custodian, not individuals holding their own keys.

The custodian pool widens: state-chartered trust companies can qualify if they hold explicit state authorization for crypto custody, maintain loss and theft safeguards, provide audited financials and internal-control reports, and segregate client assets from the firm's own. Comments stay open for 60 days after publication in the Federal Register.

Chair Paul Atkins: since Bitcoin's 2008 advent, crypto has grown from a niche curiosity to a multi-trillion-dollar asset class, yet our rules have not kept pace. The proposal follows August's Regulation Crypto Assets and reverses the direction of Gary Gensler's 2023 Safeguarding Rule, later withdrawn, which critics said would have boxed advisers out of crypto.

WangDou's Take

Seven hundred sixty pages to answer one question: can a fund manager hold its own private keys? The answer is yes, provided it first proves nobody on earth can hold them instead, proves it again every quarter, and gets two signatures per transfer. In plain language: you may keep your own house key, as long as you file a memo explaining why you did not hand it to the building manager. Peirce says regulators should protect the right to self-custody, but this document protects the exception to it. Gensler's version welded the door shut. Atkins's version opens the door and posts two guards outside. Right direction, Wall Street pace. The CLARITY Act died in the Senate in September, so with Congress not legislating, the SEC fills the gap with 760 pages of rules. Good news for institutions. For the old slogan not your keys, not your coins, it is one more polite farewell.

Source: Genfinity · SEC Proposes Crypto Custody Rule for Investment Advisers and Funds · Bankless