SEC’s Crypto Custody Guidance Sparks Debate Among Commissioners

Regulating cryptocurrency in the United States has long been a challenge, but recent guidance from the SEC is starting to bring clarity to crypto custody. The agency’s Division of Investment Management issued a no-action letter that allows registered investment advisers and regulated funds to hold crypto assets in custody with certain state-chartered trust companies without fear of enforcement. While some commissioners, including Hester Peirce, welcomed this move as a positive step, Caroline Crenshaw expressed strong concerns about its implications.

SEC Provides Guidance on Crypto Custody

The no-action letter provides clarity on how existing custody rules under the Investment Advisers Act and the Investment Company Act apply to digital assets. Until now, it was unclear whether state-chartered trust companies could be considered “qualified custodians.” 

The Division of Investment Management has now clarified the matter, stating that it “would not recommend enforcement action to the Commission under the Custody Provisions against a Registered Adviser or Regulated Fund for treating a State Trust Company as a “bank” with respect to the placement and maintenance of Crypto Assets and Related Cash and/or Cash Equivalents.” This guidance signals a potential shift in how the SEC approaches custodians for digital assets.

Peirce Sees the Letter as a Positive Step for Crypto Custody

Hester Peirce, a commissioner supportive of clearer crypto guidance, described the letter as a helpful step for advisers and funds that already invest or wish to invest in crypto. She emphasized that the letter does not alter the legal definition of custodians under the Advisers Act or the 1940 Act. Instead, it clarifies that some state trust companies already meet the standards to act as custodians if they operate under regulatory frameworks that offer investor protections comparable to other approved custodians.

Peirce also noted that the guidance will benefit investors and fund shareholders by reducing uncertainty. She suggested that it could provide an opportunity to review and update custody requirements for registered advisers and funds, moving toward more flexible, principles-based regulations that focus on protecting investors rather than relying solely on technical definitions.

Crenshaw Criticizes No-Action Letter and Custody Relief

Democratic Commissioner Caroline Crenshaw opposed the no-action letter, arguing that it weakens existing rules by allowing a new class of custodians that do not meet current standards. She said the decision lacks sufficient factual and legal support and could undermine statutory protections designed to safeguard investors.

Crenshaw also highlighted issues of fairness and consistency. The policy allows state trust companies to bypass the full application process required of other institutions by the Office of the Comptroller of the Currency. She argued that this could expose investors and markets to inconsistent protections across states, describing it as a “50-state regulatory roulette” that favors the crypto industry while potentially compromising investor safety.

The only justification for the relief seems to be a false narrative that no other entities are available to custody crypto assets consistent with our rules. But today’s relief jumps the gun: it gets ahead of Commission rulemaking, ahead of applications for federal charters with the OCC, and ahead of interest from trusted custodians who already operate within the relevant regulatory framework.

Caroline Crenshaw

The no-action letter comes as the SEC, led by Paul S. Atkins, pursues broader efforts to modernize digital asset oversight. Through Project Crypto, the agency is working to modernize its approach to digital assets and establish a clearer oversight framework. At the same time, U.S. lawmakers are pushing for a unified legal framework to bring more clarity to the digital asset market.