On September 30, the U.S. Securities and Exchange Commission (SEC) made a significant move by issuing a no-action letter that permits investment advisers to utilize state-chartered trust companies as qualified custodians for crypto assets. This development paves the way for digital asset firms, including Ripple and Coinbase, to serve registered investment funds, marking a notable shift in the regulatory landscape.
The SEC staff guidance clarifies the definition of a “bank” as outlined in the Investment Advisers Act of 1940 and the Investment Company Act of 1940. This clarification was essential to dispel doubts surrounding the eligibility of state trust companies as qualified custodians for cryptocurrencies.
According to journalist Eleanor Terrett, Brian Daly, the Director of the SEC’s Division of Investment Management, highlighted the importance of this additional clarity, stating:
“This additional clarity was needed because state-chartered trust companies were not universally seen as eligible custodians for crypto assets.”
Both of the aforementioned statutes require investment advisers to maintain their clients’ assets with qualified custodians, which are typically banks or trust companies possessing national fiduciary powers.
Ripple, Coinbase Among Beneficiaries
The SEC’s recent guidance positions major players like Ripple and Coinbase to potentially qualify as recognized custodians for crypto assets. As these firms operate as state-chartered trust companies, the previous uncertainty concerning their compliance with federal custody requirements has now been addressed.
Bloomberg ETF analyst James Seyffart praised the letter as “a textbook example of more clarity for the digital asset space” and reiterated that it provides precisely what the industry has been seeking over the last few years.
Investment advisers are now mandated to conduct annual reviews to ensure that state-chartered trust companies implement robust policies aimed at safeguarding crypto assets against theft, loss, and misappropriation.
Requirements to Be a Custodian
The no-action letter stipulates that investment advisers must review audited financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) as well as internal control reports from independent accounting firms. Furthermore, custodial agreements must clearly prohibit the lending, pledging, or rehypothecating of crypto assets without explicit client consent and require the segregation of client assets from the custodian’s balance sheet.
The guidelines apply to state trust companies that have been authorized by state banking authorities to offer crypto custody services, imposing comprehensive regulatory frameworks on these firms. These frameworks include licensing requirements, minimum capital standards, regular examinations, and enforcement authority for any non-compliance.
Brian Daly noted that the guidance is relevant to “today’s products, today’s managers, and today’s issues,” while leaving the door open for the SEC to potentially explore further rulemaking on this topic in the future.
The announcement on Ripple and Coinbase’s ability to qualify as crypto custodians under the new SEC staff guidance heralds a new era of regulatory clarity for the digital asset industry, which could lead to a more secure and structured environment for the custody of cryptocurrencies.
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