The SEC moved to close a major regulatory gap on February 15, 2023, proposing sweeping changes to how registered investment advisers must custody client assets, including crypto assets, under
The SEC moved to close a major regulatory gap on February 15, 2023, proposing sweeping changes to how registered investment advisers must custody client assets, including crypto assets, under federal securities law. The proposal would extend the existing custody framework to cover all client assets, not just funds and securities, putting crypto squarely in the crosshairs of the adviser oversight regime for the first time.
The SEC’s proposed amendments would amend and redesignate the existing Investment Advisers Act Rule 206(4)-2 as the new proposed Rule 223-1. The core shift: advisers would no longer be able to argue that crypto assets fall outside the custody rule’s scope because they are not traditional funds or securities. For related coverage, see Polkadot Holders Vote on dotUSD Proposal With $5M Backing.
SEC commissioners approved the proposal by a 4-1 vote, signaling broad internal consensus that the current rules leave client crypto assets inadequately protected. The dissent came from a single commissioner, but the majority was clear.
“Through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.”
— Gary Gensler, SEC Chair, SEC press release
Registered investment advisers manage assets on behalf of clients. Under the existing custody rule, they must use qualified custodians to hold client funds and securities. But crypto assets, depending on their legal classification, may have fallen outside that definition entirely.
The proposal would close that gap by extending the qualified-custodian requirement to any client assets in an adviser’s possession or subject to its authority. That includes crypto assets regardless of whether they are classified as securities. The SEC wants the safeguarding obligation to follow the asset, not the asset’s legal label.
The practical challenge is significant. Legal analysis from Goodwin flags that the possession-and-control standard required of qualified custodians creates real friction with how crypto actually works. Private key access, exchange transfers, and some multisig or MPC wallet arrangements may struggle to satisfy the proposed requirements. Who qualifies as a custodian, and how they prove control, is a genuinely hard technical and legal question. This is territory the SEC has also explored in its proposed rules for certain crypto investment contracts.
Crypto exchanges, in particular, face scrutiny under this framework. Those holding client assets on behalf of registered advisers would need to meet specific qualified-custodian categories or obtain the necessary registrations. That could force significant structural changes at firms currently operating outside that perimeter. SEC Chair Atkins has separately indicated that the SEC believes it can set crypto rules without new legislation, suggesting the agency views its existing authority as broad enough to act.
The proposal also includes protections designed for worst-case scenarios. Segregation and account protections would be required to shield client assets if a qualified custodian enters bankruptcy or insolvency. The FTX collapse, which occurred just months before this proposal, made that concern very concrete for regulators and clients alike.
The SEC has also been building out broader registration frameworks for the industry. A related initiative around new registration paths for crypto projects reflects the same regulatory direction: bring crypto participants into the existing compliance architecture.
The proposal opened a 60-day public comment period following Federal Register publication. That comment window matters. Industry participants, custodians, advisers, and legal experts can all weigh in on how the possession-and-control standard should apply to private keys, smart-contract wallets, and institutional custody models.
The final rule language will determine how disruptive this actually is. If the SEC adopts strict possession-and-control standards without accommodating multisig or MPC arrangements, it could effectively exclude a large portion of current crypto custody infrastructure from qualifying. If it builds in flexibility, the compliance path becomes clearer. Regulatory developments in other jurisdictions, like the FSA exchange rules shaping Japan’s crypto market, offer a reference point for how custody frameworks can be structured with more operational nuance.
Bitcoin was trading at $84,769, up 1.55% over 24 hours, in the most recent market snapshot, with a market cap above $1.7 trillion. The broader market context: the Crypto Fear & Greed Index sits at 72, in Greed territory. These figures are current market context and are not evidence of the SEC proposal’s scope or timeline.
Bitcoin market context $84,769 +1.55% over 24 hours Current Bitcoin market context from the supplied snapshot; it does not evidence the SEC’s 2023 custody proposal. Crypto sentiment context 72 Greed Broad current crypto-market sentiment from the supplied snapshot; it is unrelated to the SEC’s 2023 custody proposal.The bigger question hanging over this proposal is whether existing crypto custodians can realistically meet the qualified-custodian bar the SEC has in mind. If most cannot, who ends up holding the keys?
Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Cryptocurrency and digital asset markets carry significant risk. Always do your own research before making decisions.
The article SEC Proposal on Crypto Custody for Advisers and Funds first featured on theccpress.com.
