Blockchain Association Urges SEC to Update Crypto Custody Rules for Advisers

The Blockchain Association urged the SEC to update its custody rules for investment advisers who handle crypto assets.

In a letter responding to an SEC request for public input on digital asset custody issues (see previous coverage), the Association asserted that the current custody rule, Investment Advisers Act Rule 206(4)-2 ("Custody of Funds or Securities of Clients by Investment Advisers"), is outdated and fails to account for innovations in blockchain technology. The group said the rule, last updated in 2009, created major obstacles for registered investment advisers ("RIAs") who want to invest in or manage crypto assets on behalf of clients. The group argued that the current rules force advisers to choose between complying with SEC regulations and fulfilling client investment strategies, such as staking crypto tokens or using decentralized finance ("DeFi") tools. The Association noted that many traditional custodians lacked the technology or willingness to support these activities.

The Association called on the SEC to allow RIAs to self-custody crypto assets when appropriate safeguards were in place. They also asked the SEC to expand the definition of "qualified custodian" to include crypto-native firms, state-chartered trust companies and properly regulated crypto exchanges, arguing that these changes would give advisers more flexibility to act in the best interests of their clients.

The Association emphasized that a principles-based and technology-neutral approach would better serve both investors and innovation. The group recommended the SEC focus on whether custody arrangements included proper risk controls, disclosures and client consent, rather than prescribing specific types of storage or custody providers. The Association also urged the SEC to clarify that activities like staking or temporarily locking assets in smart contracts should not be seen as a violation of custody requirements. The Association said the SEC should allow RIAs to decide whether to use cold (offline) or hot (online) storage, based on client needs and security risks.