U.S. SEC Takes Preliminary Step to Expand Universe of Crypto Custody to State Trusts

The U.S. Securities and Exchange Commission has cracked the door to welcome crypto custody at a wide range of firms who've earned state charters as trust companies — a list that would include the trust affiliates of Coinbase, Kraken and other high-profile names in crypto.

The SEC's Division of Investment Management issued a so-called no-action letter on Tuesday, a document that assures that the regulator doesn't intend to pursue any enforcement actions by those engaging in the specific activity — in this case, that SEC-registered advisers and funds can park digital assets in state trusts.

Such qualified-custodian questions had represented a policy battleground during the tenure of former SEC chairs Gary Gensler and Jay Clayton, the former having led the agency to introduce a later-abandoned proposal that would have constrained what kinds of companies could handle the crypto of regulated investment advisers. Gensler made it clear he specifically meant to muscle out exchanges such as Coinbase.

But the SEC's new management — most notably Chairman Paul Atkins — is pursuing a crypto-forward campaign, with Atkins saying earlier this week that establishing industry policies is the agency's top priority (as assigned by pro-crypto President Donald Trump).

While Tuesday's no-action letter isn't a formal agency rule, it carries enough weight to free firms from short-term compliance worries. Specifically, the document said the SEC "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."

The earlier argument from Gensler was that crypto firms weren't safe and sufficiently regulated to qualify as risk-free enough for registered investment advisers to keep their customers' assets.

"Even though it was never adopted, the proposal has created problems for investment advisers through its assertion that most crypto assets are likely to be funds or crypto asset securities covered by the current rule, and thus must be maintained with a qualified custodian," Commissioner Hester Peirce said in a speech in Singapore on Tuesday.

She argued that the agency "should consider updating the rules governing permissible custodians for registered investment advisers and investment companies," adding that maybe technologically adept companies should be permitted to custody assets themselves.

But Democratic Commissioner Caroline Crenshaw, who was allied with Gensler on this point two years ago, issued a statement opposing the no-action treatment, saying the SEC is effectively treating crypto as something apart from the rest of the financial sector. And it's ignoring the efforts of firms pursuing federal chartering from the Office of the Comptroller of the Currency.

"Rather than create a level playing field, we leave investors and the markets to gamble in an unnecessary game of 50-state regulatory roulette – just to accommodate crypto," she said. "Executing a shift of this magnitude via no-action relief without public comment and without any economic analysis is ill-advised for many reasons, not least of which because it likely violates the Administrative Procedure Act, though this has become commonplace by this commission."

The SEC has been pursuing a number of crypto policies under Atkin's recent Project Crypto, and the chairman has set an agenda to issue formal crypto rules in the coming months. Meanwhile, Congress has made extensive progress on legislation to more completely regulate the U.S. digital assets markets.