SEC No-Action Letter Creates Opening for More Firms to Serve as Crypto Custodians

The Securities and Exchange Commission said in a letter Tuesday that it will not take action against registered investment advisors, cryptocurrency fund issuers, and other entities that use state-characteristic trusts to hold digital assets.

The updated guidance answers questions submitted by lawyers representing financial advisors from the SEC’s investment management department, creating the potential for many organizations as managers of these assets, including affiliates of prominent crypto-focused companies such as Coinbase and Ripple.

“On the basis of your letter, the investment department does not recommend enforcement action. … to a registered advisor or regulatory fund to treat state trust companies as “banks” related to the placement and maintenance of crypto assets and related cash and/or cash equivalents,” the SEC letter states that, as long as certain criteria are met with both the advisor and the trust.

The SEC letter provides the latest shift from the SEC’s involuntary approach to crypto, under former chairman Gary Gensler, who has sought to limit the types of organizations that can detain digital assets.

In July, current chairman Paul Adkins announced “Project Crypto, a SEC initiative to dramatically reduce the regulatory burden on the Crypto industry and accelerate the integration of digital assets within the traditional US economy.”

The Investment Advisory Act of 1940 requires advisors to maintain client assets in banks, trusts, or other qualified custodians who hold obligations as state trustees. Crypto supporters have used the law to enable a broader range of crypto initiatives.

The letter is not a formal rule or regulation and therefore “has no legal force or effect” or “changes or amends applicable laws,” the SEC says.

However, the agency has held responsibility for ensuring that registered trusts are permitted to provide cryptographic custody services by the relevant banking authorities, and has developed policies and procedures to protect those assets, addressing issues such as key private management.

A detention agreement in which an advisor’s signature requires the trust to ensure that the trust lends money without the client’s consent, otherwise uses the funds, or “separates the crypto assets from the assets of the state trust company.”

According to the SEC letter, “If we determine that the use of a state trust company’s administrative services is the greatest interest of the RIA client or regulatory fund and its shareholders, the trust may serve as a manager.

The letter attracted praise from Bloomberg ETF analyst James Seyfert. James Seyfert wrote in X’s post, “A more clear example of a textbook in the field of digital assets.”

“It’s like the industry has been looking for over the past few years,” he wrote. “And it keeps coming.”