SEC sends crypto custody rule to White House

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The U.S. Securities and Exchange Commission has sent a proposal on how investment advisers should safeguard crypto assets to the White House for review, advancing a rulemaking effort that could reshape the custody obligations facing firms managing digital assets for clients.

The Office of Information and Regulatory Affairs, a unit of the White House Office of Management and Budget, is reviewing the measure before the SEC can move it through the federal rulemaking process. The review does not make the proposal effective, and the agency has not yet published final custody requirements.

The SEC said the initiative is intended to “clarify the framework for the custody of crypto assets for investment adviser and investment companies.” It would also include unspecified modernizations designed to reduce burdens associated with provisions the agency considers outdated.

For registered advisers, custody rules determine the conditions under which client property can be held, controlled, verified and protected. Applying those principles to crypto has remained difficult because digital assets can be transferred through private keys, held through third-party platforms, or embedded in smart-contract arrangements that do not map neatly onto traditional securities custody models.

Custody questions move closer to a formal SEC proposal

The SEC said it has received questions from investment advisers over how to meet existing custody obligations while holding crypto assets on behalf of clients. Those questions have grown more pressing as asset managers, brokerages, banks and specialist custodians seek to offer regulated access to digital assets without assuming unclear compliance risks.

A formal SEC framework could give advisers clearer parameters for selecting custodians, maintaining control over client assets and documenting safeguards against loss or unauthorized transfers. The practical effect would depend on the proposal’s eventual wording, particularly whether the SEC recognizes particular forms of wallet control, blockchain-based settlement arrangements or qualified third-party custodians.

The White House review places the proposal in an interagency stage used for significant federal regulations. OIRA generally examines rules for consistency with administration policy and their anticipated effects before an agency publishes them for public comment or adopts a final version. The review can result in changes, delays or clearance for the SEC to proceed.

That means firms should not treat the submission as a new operative custody standard. Existing legal duties remain in place until the SEC completes its process and publishes any final rule with an effective date.

Atkins-era SEC pursues more tailored crypto policies

The custody initiative arrives during a period in which the SEC, led by Chair Paul Atkins, has sought to set out more explicit positions on several areas of crypto regulation.

Over the past year, the agency has issued guidance saying memecoins do not automatically fall within the definition of securities. It has also described staking arrangements that, in the SEC’s view, sit outside federal securities laws. Those statements have sought to distinguish between transactions that may involve investment contracts and activities involving digital assets that do not meet that threshold.

Last week, the SEC released a proposal called “Regulation Crypto Assets,” which it described as a tailored offering regime intended to help companies raise capital while preserving trader protections. The agency said the framework builds on March guidance from the SEC and Commodity Futures Trading Commission addressing the application of federal securities laws to digital assets and related transactions.

Taken together, the initiatives point toward a more segmented approach than the SEC’s earlier enforcement-heavy posture. Rather than treating custody, token offerings, staking and token classification as one regulatory question, the agency is developing separate pathways for different activities. That approach could make compliance easier to evaluate for firms, though it also creates several overlapping proceedings with different timelines.

Atkins has separately discussed an innovation exemption that could provide faster consideration and regulatory relief for companies issuing tokenized securities through decentralized or other novel platforms. The SEC has not formally introduced that exemption, leaving its scope, eligibility requirements and legal basis unresolved.

Banks and advisers still face unanswered operational questions

A custody rule could be particularly consequential for traditional financial institutions that want to manage crypto allocations for advisory clients. Many already provide adjacent services, such as research, trading access or fund exposure, but direct custody of blockchain-based assets raises operational questions beyond those involved in holding conventional securities.

Private-key management is central. A misplaced or compromised key can result in irreversible transfers, while multi-signature wallets, distributed key systems and third-party custodial arrangements can divide authority among several parties. A future SEC rule may need to address how advisers demonstrate control, how they conduct audits and what protections clients receive if a service provider fails.

The agency’s reference to investment companies also broadens the potential reach beyond individual advisory accounts. Registered funds and other regulated vehicles have increasingly explored exposure to crypto assets, whether through direct holdings, exchange-traded products or tokenized financial instruments. Clearer custody standards could influence which structures are considered viable for products seeking SEC registration.

The proposal also arrives while Congress continues to debate broader market-structure legislation. Senator Cynthia Lummis has supported separate legislation intended to establish a more comprehensive federal framework for digital assets, but that work remains subject to the legislative calendar and congressional negotiations.

The SEC’s rulemaking cannot replace legislation defining the long-term division of authority between the SEC and CFTC. It can, though, establish conduct standards for entities already within the SEC’s jurisdiction. The custody proposal therefore places a narrower but commercially significant issue on a track that does not require Congress to first pass a full crypto market-structure bill.

The next public milestone will be an SEC publication following the White House review. Any proposed rule would ordinarily open a comment period, allowing advisers, custodians, banks, fund managers and consumer advocates to challenge definitions, compliance costs and technical assumptions before the agency decides whether to adopt final requirements.