The U.S. Securities and Exchange Commission issued no-action relief on September 29, 2025, confirming that state-chartered trust companies can serve as qualified custodians for cryptocurrency assets held by registered investment advisers and funds. This guidance provides regulatory clarity for institutional adoption of digital asset custody arrangements that comply with the Investment Advisers Act of 1940 and the Investment Company Act.
What is a Qualified Custodian
A qualified custodian is a financial institution meeting specific regulatory standards to hold client assets. Under the Investment Advisers Act of 1940, registered investment advisers are generally required to maintain client funds and securities with a qualified custodian to protect investors through regulatory oversight. Traditional qualified custodians include national banks, federal savings associations, registered broker-dealers, and futures commission merchants. The cryptocurrency industry has faced challenges because many digital asset custodians did not fit these existing regulatory categories.
SEC No-Action Relief for State Trust Companies
On September 29, 2025, the SEC’s Division of Investment Management issued a no-action letter confirming that registered investment advisers and registered investment companies may treat certain state-chartered trust companies as banks for custody purposes, specifically for the maintenance of crypto assets and related cash or cash equivalents. According to analysis from Sidley Austin, this relief provides long-sought clarity for advisers wishing to engage in digital asset strategies. The SEC staff would not recommend enforcement action under the Advisers Act or the Investment Company Act if an adviser treats a qualifying state trust company as a permissible custodian.
Conditions for Using State Trust Companies As Custodians
The no-action relief establishes specific requirements before a state trust company can serve as a qualified custodian for digital assets, according to analysis from Hunton Andrews Kurth.
First, the registered adviser or fund must have a reasonable basis, after due inquiry, for believing that the state trust company is authorized by the relevant state banking authority to provide custody services for crypto assets. This authorization must be verified prior to engagement and reassessed annually.
Second, the state trust company must maintain and implement written internal policies and procedures designed to safeguard crypto assets from theft, loss, misuse, and misappropriation. These policies must address private key management and cybersecurity protocols.
Third, a written custody agreement must be executed that includes protections against unauthorized use, rehypothecation, or pledging of assets without client consent. All crypto assets held in custody must be segregated from the trust company’s own assets.
How Crypto Custody Differs From Traditional Custody
Traditional custody involves the physical or electronic safekeeping of securities and cash in accounts maintained by regulated institutions, with the custodian controlling access and maintaining records of ownership. According to analysis from Proskauer Rose, crypto custody differs fundamentally because there is no physical asset and no centralized ownership record.
Blockchain technology records wallet activity and balances on a distributed ledger. Custody of crypto assets primarily involves managing private keys, the cryptographic credentials that authorize transactions. Whoever controls the private keys effectively controls the assets. This distinction creates unique risk considerations: unlike traditional securities, crypto assets can be irreversibly transferred if private keys are compromised, and there is no centralized authority to reverse unauthorized transactions, making cybersecurity and key management central to the custody function.
The Proposed Safeguarding Rule and Its Implications
Beyond the no-action relief, the SEC has proposed broader regulatory changes through Rule 233-1, which would replace the existing custody rule. The proposed safeguarding rule would cover virtually all client assets, including crypto assets, regardless of whether they are classified as securities.
Under the proposed framework, qualified custodians would be required to maintain possession or control of custodied assets and would be required to participate in any change in beneficial ownership. For crypto assets, this means the custodian would need to generate and maintain private keys in a manner that prevents advisers from unilaterally transferring assets. The proposal also introduces additional requirements, including annual evaluations by public accountants, provision of account statements, and enhanced record-keeping obligations.
Impact on Institutional Digital Asset Adoption
The clarification of qualified custodian rules has practical consequences for institutional adoption of digital assets. Before the September 2025 guidance, many investment advisers were uncertain whether their preferred crypto custodians met regulatory requirements, creating compliance risk and limiting the range of digital asset strategies available to regulated funds.
With state trust companies now explicitly eligible to serve as qualified custodians for crypto, advisers have expanded options for securing digital assets within compliant frameworks. Companies like BitGo Trust Company and Coinbase Custody Trust Company, both state-chartered trust companies, have positioned themselves as institutional-grade custody providers.
Key Considerations for Investment Advisers
Investment advisers evaluating crypto custody arrangements should conduct thorough due diligence on prospective custodians. This includes verifying state banking authority authorization, reviewing internal control reports, assessing cybersecurity infrastructure, and ensuring the custody agreement meets all conditions outlined in the SEC guidance. Advisers should also monitor ongoing regulatory developments, as the proposed safeguarding rule could introduce additional requirements when finalized. The regulatory environment for digital asset custody remains dynamic, and compliance strategies should account for potential changes.
Frequently Asked Questions
What is a qualified custodian for crypto?
A qualified custodian is a regulated financial institution authorized to hold client crypto assets, including banks, broker-dealers, and eligible trust companies.
Can state trust companies hold crypto assets?
Yes, following the SEC’s September 29, 2025 no-action relief, qualifying state-chartered trust companies can serve as custodians for digital assets.
What protections must a crypto custody agreement include?
Agreements must include protections against unauthorized use, rehypothecation, and require full segregation of client crypto assets from custodian assets.
How does crypto custody differ from traditional custody?
Crypto custody focuses on managing private keys on a distributed ledger rather than holding physical or electronically recorded securities.
What is the SEC’s proposed safeguarding rule?
Rule 233-1 would expand custody requirements to cover all client assets, including crypto, requiring custodians to maintain possession of private keys.
Why are qualified custodian rules important for institutions?
They provide regulatory certainty, enabling investment advisers and funds to hold digital assets within compliant, investor-protective frameworks.
What due diligence should advisers perform on crypto custodians?
Advisers must verify state authorization, review internal controls, assess cybersecurity, and confirm custody agreements meet SEC guidance conditions annually.
