1. What Happened
In a landmark development, the U.S. Securities and Exchange Commission (SEC) has issued a no-action letter allowing registered investment advisers (RIAs) and regulated funds to use state-chartered trust companies as custodians for crypto assets.
Under existing rules in the Investment Advisers Act of 1940 and the Investment Company Act of 1940, advisers are required to hold client assets with “qualified custodians,” typically federally regulated banks or trust companies. For years, there has been ambiguity about whether state trust companies fit this definition.
The SEC’s no-action relief clarifies that, under certain conditions, state trust companies can qualify as custodians for crypto assets and related cash equivalents. This provides much-needed regulatory clarity for investment firms that manage digital assets and had previously struggled with compliance uncertainty.
The relief, however, is not a new rule but rather staff guidance — a form of assurance that the SEC’s Division of Investment Management will not recommend enforcement action against advisers using state trust custodians, provided they meet specific safeguards.
2. Key Conditions for Using State Trust Custodians
The SEC’s relief comes with a list of requirements that advisers and funds must follow before engaging a state trust company. These conditions are designed to ensure investor protection and operational integrity.
| Requirement | Summary |
|---|---|
| Due Diligence & Annual Review | Advisers must conduct thorough due diligence before engaging a state trust company and repeat the review annually. This includes evaluating authorization, financial stability, audits, and internal controls. |
| Segregation of Assets | Custodial agreements must ensure that clients’ crypto assets and cash are segregated from the custodian’s proprietary holdings. |
| Prohibition on Lending or Rehypothecation | The state trust company cannot lend, pledge, or use the crypto assets for any other purpose without explicit client consent. |
| Risk Disclosure | Advisers must inform clients and fund boards about the risks associated with using state trust custodians, including cybersecurity and insolvency concerns. |
| Best Interest Standard | The adviser must determine that using the state trust company serves the best interest of its clients or shareholders. |
Failure to meet these standards could invalidate the relief, leaving the adviser exposed to enforcement action.
3. Market and Industry Reactions
The SEC’s move has drawn mixed reactions — ranging from optimism among institutional investors to caution from within the Commission itself.
Positive Industry Impact
- Expanded Custody Options – The decision broadens the pool of qualified custodians, making it easier for investment firms and crypto funds to store digital assets securely.
- Regulatory Clarity – The long-standing uncertainty over whether state-chartered trust companies could act as custodians has finally been addressed.
- Encouragement for Innovation – State trusts often lead in developing specialized custody technology, such as multi-signature wallets, cold storage, and staking services.
- Competition and Cost Efficiency – More qualified custodians entering the market could reduce fees and foster innovation across custody solutions.
Criticisms and Concerns
- Investor Protection Risks – Critics argue that some state-chartered trusts operate under lighter regulatory regimes than federally chartered banks, potentially weakening safeguards against fraud or loss.
- Bypassing Federal Oversight – Allowing state trusts may sidestep the Office of the Comptroller of the Currency (OCC), which oversees nationally chartered institutions.
- Lack of Public Comment – Some Commissioners believe such a major shift should have gone through formal rulemaking rather than being issued as a staff letter.
- Uneven Oversight – State-level regulation of trust companies varies widely, which could lead to inconsistent investor protection standards across jurisdictions.
- Non-Binding Nature – The guidance is not law; future SEC leadership could easily revise or revoke it, leaving advisers uncertain about long-term reliance.
Commissioner Hester Peirce praised the move as a pragmatic step toward aligning policy with market reality. In contrast, Commissioner Caroline Crenshaw warned that the decision could “poke holes” in the investor protection framework if not carefully monitored.
4. The Bigger Picture: Why This Matters
The SEC’s action doesn’t exist in isolation. It comes at a time when regulators worldwide are reassessing how digital assets should be held, accounted for, and supervised.
A. The Banking Comeback
Traditional banks and financial institutions are showing renewed interest in crypto custody. The reversal of restrictive accounting rules earlier this year, along with broader acceptance of digital asset ETFs, has encouraged banks to re-enter the crypto services market. Institutions like U.S. Bancorp and BNY Mellon are once again exploring secure, regulated custody frameworks for digital assets.
This environment makes the SEC’s timing strategic. By legitimizing state trust companies as custodians, the agency has indirectly opened the door for banks and hybrid custodians to expand their service offerings without waiting for lengthy new rulemaking.
B. Technology and Security Standards
Crypto custody is fundamentally different from traditional asset custody because of private key management. Loss, theft, or compromise of private keys can mean irreversible loss of assets. With more custodians entering the field, scrutiny over their security frameworks will intensify.
Expect heightened focus on:
- Multi-signature wallet architecture
- Cold storage protocols and access control
- Real-time auditing and proof-of-reserves verification
- Comprehensive incident response mechanisms
Only those custodians that demonstrate resilience and transparency will win institutional trust.
C. Custody as the Next Competitive Frontier
In crypto markets, custody is not just about storage — it’s about confidence. Institutions choose custodians not merely for security but also for their ability to integrate with trading systems, offer staking support, and comply with both federal and state laws.
As more regulated custodians emerge, competition is expected to shift toward bundled offerings: custody plus staking, custody plus yield management, or custody integrated with on-chain reporting. Those who can combine compliance, technology, and trust will dominate the next phase of institutional adoption.
5. The Political and Regulatory Undercurrents
The split among SEC Commissioners highlights an ongoing policy divide inside the agency. While some favor a flexible, innovation-friendly approach, others remain concerned about investor protection and systemic risk.
This letter also interacts with the SEC’s broader custody agenda. The Commission is expected to propose formal custody rule changes in the coming months, potentially codifying — or restricting — what this no-action relief currently allows.
Meanwhile, the decision could motivate Congress to revisit federal custody standards for crypto, creating a unified national framework rather than a patchwork of state interpretations.
6. What Market Participants Should Watch
- Adoption Trends: Which major RIAs or funds begin using state-chartered trust companies as custodians?
- State-Level Reforms: States like New York, Wyoming, and Texas may introduce clearer regulatory frameworks for digital asset trust companies.
- Auditing Standards: Expect growing demand for independent audits, SOC reports, and public proof-of-reserves statements.
- Rulemaking Updates: The SEC may eventually formalize these provisions through an official rule, giving them greater permanence.
- Custodian Partnerships: Watch for alliances between fintech custodians, traditional banks, and digital exchanges to strengthen institutional custody infrastructure.
7. Final Take: A Measured Step Toward Maturity
The SEC’s guidance signals a measured yet meaningful shift in the regulatory landscape for digital assets. By recognizing state-chartered trusts as potential custodians, it opens doors for institutional investors while demanding strong compliance and risk controls.
It’s a balancing act between innovation and protection — one that could shape how traditional finance integrates with the digital asset world over the next decade.
Yet, caution remains warranted. Because this policy is not legally binding, it could change with new leadership or future enforcement priorities. Advisers and custodians must therefore treat it as an opportunity — but one that must be navigated with rigorous due diligence, transparency, and long-term prudence.
In short, the door to regulated crypto custody has finally opened wider — but walking through it will require both courage and caution.
