The SEC Crypto Custody Plan Leaves Keys With Advisers

The Securities and Exchange Commission proposed crypto custody rules on Oct. 1, 2026, that would let registered investment advisers hold client crypto when no permitted custodian will. The package also names state trust companies as permitted crypto custodians, subject to yearly checks. It is a proposal, not a final rule.

Paul S. Atkins, chairman of the Commission, said the plan would give advisers and funds a compliant pathway where none existed before. The client still does not hold the keys. The adviser does, and only after a finding that a third-party custodian is not available.

The Keys Stay With the Adviser

Current custody rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 generally send client funds and securities to a permitted custodian such as a bank or a broker-dealer. Atkins said those rules “contemplate the custody and safekeeping only of traditional assets” and that “custodial capabilities may lag an asset’s deployment by many months.” The new text would treat that lag as a legal fact, then build a fallback around it.

That fallback is what the Commission calls self-custody. Commissioner Hester M. Peirce put quotation marks around the phrase on purpose. In her statement she said the draft “does not reflect true self-custody by investors” and that she would have preferred “shelf-custody,” because the adviser is the one holding the assets for the client.

My use of quotes around the term “self-custody” is intentional. The proposal uses the term in a way that does not reflect true self-custody by investors. Rather, it focuses on advisers acting as custodians for their clients’ assets and deems that situation to be “self-custody.”

Hester M. Peirce, Commissioner, statement on the custody proposal

The announcement on Atkins’s official account restated the same pitch: a multi-trillion-dollar asset class sitting under rules that “have not kept pace.”

Since the advent of Bitcoin in 2008, the crypto asset market has grown from a niche curiosity into a multi-trillion-dollar asset class to which investors actively seek exposure. Unfortunately, our rules and regulations have not kept pace.

To that end, today’s proposal would… https://t.co/9C5LvRb8b5

— Paul Atkins (@SECPaulSAtkins) October 1, 2026

Replies treated the filing as a political reversal. They spent far less time on the mechanics. Those mechanics keep control inside the firm. Transfers would need two people on the adviser’s side. Each client’s coins would sit in addresses that hold only that client’s assets. A personal wallet is not part of the design.

Why Qualified Custodians Still Cannot Cover New Tokens

The Commission’s fact sheet is blunt about the gap. Permitted custodians “have not been able to support all crypto assets given the large and continuously growing number of crypto assets in the market,” and they “may not yet offer custodial services for nascent or novel assets.” Some state-chartered limited purpose trust companies already try to fill that hole. Under today’s text, deciding whether such a firm counts as a “bank” is a fact-specific slog through state and federal law.

That is the second-order problem the headline misses. An adviser that wants to put a new token into a separately managed account or a regulated fund cannot wait months for a bank to add the asset. The 2023 attempt to rewrite the custody rule did not solve that. It told firms to use a qualified custodian and then cast doubt on whether any custodian could show exclusive control over a crypto asset.

On Sept. 14, 2026, speaking at the Solana Policy Institute Summit, Atkins had already asked staff for a proposal that would answer “yes” to two questions that, he said, “continually plague” venture and asset-management desks: can an adviser custody crypto for clients, including a regulated fund, and can it use a state trust company instead. He said yes to self-custody “because for too many assets a qualified third-party custodian simply does not exist yet,” and yes to state trusts “because that pathway already works in practice.”

A 2023 Plan Left Advisers With No Legal Path

Peirce compared the last several years of crypto custody to a roller coaster that advisers “have been gritting their teeth and holding on for dear life” to finish. The 2023 safeguarding proposal, she wrote, “threw these advisers for another loop.” Compliant crypto custody “looked impossible,” and the release “suggested that many advisers were already on the wrong side of the law.”

Commissioner Mark T. Uyeda, who had supported putting that 2023 draft out for comment, was harsher on the substance. He said it built a “no-win” setup. Advisers would have been told to park crypto with a qualified custodian while the same release doubted that any custodian could prove exclusive control. Staff Accounting Bulletin No. 121, issued March 31, 2022, had already pushed firms that safeguard crypto to put those assets on their own balance sheets, which, Uyeda said, “effectively deterred companies from safeguarding crypto-assets.”

THE CUSTODY FIGHT SINCE 2022

1. March 31, 2022: Staff Accounting Bulletin No. 121 tells firms that safeguard crypto assets to recognize them on the balance sheet, a treatment Uyeda said drove would-be custodians away.
2. Feb. 15, 2023: The Commission proposes Safeguarding Advisory Client Assets (Release No. IA-6240), requiring a qualified custodian while questioning whether exclusive control is even possible for crypto.
3. Sept. 14, 2026: Atkins tells staff to draft a proposal that answers yes to adviser self-custody and yes to state trust companies, under conditions.
4. Oct. 1, 2026: The Commission issues the new proposing release, file number S7-2026-35, Release Nos. IA-7023 and IC-36353.

Uyeda’s line on the new draft is that “rules that are unworkable in practice will not protect investors but merely provide the illusion of protection.” He called the Oct. 1 text “a workable path to compliance” that still treats self-custody as a conflict of interest sitting under the adviser’s fiduciary duty.

Two People Must Sign, and Most Firms Cannot

Self-custody would not be a standing option. The adviser must find, before taking the assets and every quarter after, that a permitted custodian is not available to hold that crypto asset. If that finding fails, the fallback closes. The operational bar is written for a firm that already runs key management, not for a shop that wants a shortcut around a bank.

THE SELF-CUSTODY CONDITIONS

• The availability test: The adviser must find that no permitted custodian is available, then repeat that finding every quarter.
• The two-person rule: Safeguarding systems must cover private key management and joint authorization by at least two people for any crypto asset transaction.
• The address split: Each client’s crypto must sit in one or more network addresses that store only that client’s assets.
• The outside check: Within six months of taking self-custody, and every year after, an independent public accountant must report on custodial control objectives.
• The paper trail: Quarterly account statements go to each client, cybersecurity controls get an annual review, and the client agrees in writing to treat the asset as a “financial asset” under state law.

For a regulated fund, the board has extra work. It would review, at the start and every quarter, the adviser’s written basis for believing no qualified custodian is available, and would decide at the start and every year that self-custody with the fund’s own adviser still amounts to reasonable care.

That stack does not match how most advisory firms are built. The Investment Adviser Association’s 2026 Snapshot found that 16,544 SEC-registered advisers managed $176.8 trillion in regulatory assets at year-end 2025 for 73.7 million clients. Some 67.4% of those advisers managed less than $1 billion. Firms that focus on individual clients averaged 8 employees and $424 million in assets.

An eight-person office can hire a state trust company. It cannot stand up two-person key control, a dedicated address scheme, a six-month accountant report, and a quarterly no-custodian memo for every thin token a client asks about. The self-custody clause is a pressure valve for crypto-native advisers and for assets that still have no bank buyer. It is not how $176.8 trillion moves.

State Trust Companies Get a Clearer Seat

The provision that can scale sits next to the fallback. The proposal would let advisers and regulated funds keep client crypto at a state trust company if they complete a due inquiry before hiring the firm and every year after. They would need a reasonable basis for believing the company is authorized by the relevant state banking authority to custody crypto, that it has written policies to guard against theft, loss, misuse, and misappropriation, and that they have reviewed the latest audited financial statements and the latest internal control report. Client and fund crypto would have to be segregated from the trust company’s own assets.

Peirce said eligible state trusts would “increase competition and expand investor protection and investment options.” Uyeda said those companies “have become important participants in the crypto custody ecosystem” and that naming the conditions gives advisers, funds, and custodians “greater flexibility and certainty about how to structure these arrangements.”

THREE LEGAL PATHS UNDER THE PROPOSAL

The rest of the release is a long-overdue cleanup of rules Atkins said “have not been amended for decades.” It would drop the requirement that accountants used under the Advisers Act custody rule be registered with, and inspected by, the Public Company Accounting Oversight Board. It would carve authorized discretionary trading out of the custody rule if trades stay in designated client accounts and cannot move to accounts the adviser or its related persons control. Standing letters of authorization and some cases of inadvertent custody would get exceptions. Broker-dealer custody for regulated funds would lose old conditions. Records kept on a crypto network could satisfy the books-and-records rules, with limits. Form ADV and Form N-CEN would start collecting more detail on crypto custody and tokenized fund shares.

Where the Custody Rule Applies

The Advisers Act custody rule covers funds and securities the adviser has custody of. The Investment Company Act rules cover a regulated fund’s securities and similar investments. Peirce flagged the limit in a footnote to her statement: the proposed Advisers Act amendments “would only apply with respect to crypto assets that are funds or securities (or, with respect to the account of a regulated fund, a security or similar investment),” and the Investment Company Act pieces “would only apply with respect to crypto assets that are securities or similar investments.”

That scope is easy to miss in a headline about “crypto custody.” Bitcoin as a commodity in a private account is not the same legal object as a crypto asset that is a fund or a security, or as a tokenized share sitting in a registered fund. Atkins tied this filing to a wider stack: a December 2025 staff no-action letter to the Depository Trust Company on a voluntary securities tokenization pilot, a January 2026 staff statement on tokenized securities, an interpretation of when crypto assets are securities, the August proposal of Regulation Crypto Assets, and a later Innovation Exemption for trading tokenized NMS stock.

In that stack, the custody text is the plumbing. It answers what an adviser or a fund is supposed to do with the asset once the offering and trading pieces exist. It does not rewrite Howey, and it does not put a retail wallet under Commission supervision.

Comments Will Test the Two-Person Control

The public comment period stays open for 60 days after the proposing release appears in the Federal Register. That clock had not started as of Oct. 2, 2026. Peirce asked market participants to “invest the time to read the lengthy proposing release and respond to its many requests for comment.” The live arguments are already visible in the text the Commission put out.

One fight is the name. Calling the fallback self-custody invites a retail reading that Peirce tried to kill on day one. Another is the quarterly availability test. A crypto-native adviser that builds a two-person key shop for a thin token will have to keep proving that no state trust or bank has listed the asset, then unwind the setup if one has. A third is the state-trust due inquiry. Annual reviews of authorization, policies, audits, and control reports are lighter than a full federal bank charter, and commenters will argue whether that is enough investor protection or still too much friction for a market that already uses those firms.

Atkins placed the filing inside a political brief as well as a legal one. He said the Commission proposed “to close a gap that has left investment advisers and funds guessing how to effect lawful custody of an asset class that their clients increasingly demand,” and that more proposals are “on the horizon” as he works “to help President Trump cement the United States as the crypto capital of the world.” The custody rule is the piece that decides who is allowed to hold the coins while that project runs.

Until the comment file closes and the Commission votes, the only keys that moved are the ones on the page. Advisers still cannot treat the draft as a license. Clients still should not expect a personal wallet from a firm that is, under this text, acting as their custodian.

Disclaimer: This article is news reporting and analysis of a proposed SEC rulemaking. It is informational only and is not investment, legal, tax, or crypto-asset advice, and it is not a recommendation to buy, sell, hold, or custody any digital asset or security. Readers who may be affected by custody arrangements, including advisory clients, fund investors, and compliance staff, should consult a licensed attorney and a qualified investment adviser before changing how assets are held. Figures, file numbers, and the status of the proposal reflect the Commission’s Oct. 1, 2026 materials and related statements; the comment period, the Federal Register date, and any final rule may change those terms.