SEC Allows State Trust Companies to Custody Crypto Assets
In a no-action letter, the SEC Division of Investment Management ("Division") permitted advisers and funds to treat State Trust Companies as "banks" to allow custody of crypto assets and related cash.
Under the no-action position, the Division said that advisers and funds may rely on State Trust Companies as qualified custodians under Section 206(4) and Rule 206(4)-2 ("Prohibited transactions by investment advisers") under the Advisers Act and Sections 17(f) ("Custody") and 26(a) ("UITs") under the Investment Company Act, provided certain safeguards are met. These include (i) conducting initial and annual due diligence to confirm state authorization and review of audited financials and internal control reports, (ii) entering into written custodial agreements prohibiting rehypothecation without consent and requiring segregation of assets, (iii) disclosing the material risks of using State Trust Companies for custody to clients or fund boards, and (iv) reasonably determining that using such custodians is in the best interests of clients or shareholders.
The SEC said that the relief responds to long-standing uncertainty over whether State Trust Companies meet the statutory definition of a "bank," which requires that a substantial portion of their business involve deposits or fiduciary powers. The SEC said granting the relief is based on the role State Trust Companies currently play under state licensing, capital, and supervisory oversight and other sophisticated state controls that ensure safekeeping of crypto assets, including: "(i) so-called "deep" cold storage of crypto assets; (ii) third-party annual audits of financial statements; (iii) third-party reports regarding financial, governance, and information technology processes and controls, including system and organization controls reports (e.g., SOC-1 and/or SOC-2 reports); (iv) cybersecurity, physical security, and business continuity policies and procedures; (v) complex encryption protocols and crypto assets movement verification controls; and (vi) policies and procedures concerning private key generation and storage."
Commissioner Hester Peirce welcomed the no-action relief and emphasized that the letter does not expand the definition of permissible custodians but clarifies that State Trust Companies already fit within it under comparable regulatory frameworks. She argued that the letter ends a harmful regulatory gray zone and affirms the role of State Trust Companies as key custodians.
Commissioner Caroline Crenshaw criticized the no-action relief and warned it weakens longstanding custody protections that safeguard investors against theft, loss, and misappropriation. She argued that state trust companies operate under a patchwork of weaker rules than federally regulated custodians, that the relief rests on a false narrative of no available alternatives, and that it unfairly favors them over applicants pursuing national charters. She stressed that carving out special treatment for crypto assets through staff relief—rather than public rulemaking—erodes statutory protections and exposes investors to greater risks.