SEC Clarifies State Trust Companies as Qualified Digital Asset Custodians ∞ Regulation

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Briefing

The U.S. Securities and Exchange Commission’s (SEC) Division of Investment Management issued a no-action letter on September 30, 2025, confirming that registered investment advisers (RIAs) and registered investment companies may treat certain state-chartered trust companies as “banks” for digital asset custody purposes. This action significantly broadens the permissible qualified custodians for crypto-assets, thereby lowering a substantial barrier to entry for traditional financial institutions seeking to engage with digital asset strategies. The relief is conditioned on specific investor protection safeguards and diligence requirements.

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Context

Before this no-action relief, significant legal ambiguity surrounded whether state-chartered trust companies met the “bank” definition under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, which is crucial for acting as a qualified custodian. This uncertainty created a compliance challenge, limiting options for RIAs and registered funds seeking to custody digital assets with regulated entities and hindering broader institutional participation in the digital asset market. Previous guidance from the SEC staff had expressed skepticism regarding state-chartered institutions’ ability to meet the “bank” definition for custody rule purposes.

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Analysis

This no-action letter directly alters the operational requirements for RIAs and registered funds by expanding the pool of entities that can serve as qualified custodians for digital assets. Firms can now integrate state-chartered trust companies into their compliance frameworks, provided they conduct initial and annual assessments, ensure robust safeguarding policies, and establish segregated custody agreements. This development streamlines product structuring for digital asset offerings and mitigates a key regulatory risk, fostering greater institutional confidence in the digital asset market. The relief’s principles-based approach to safekeeping emphasizes investor protection without prescribing specific technologies, ensuring flexibility for evolving custody solutions.

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Parameters

Issuing Authority ∞ U.S. Securities and Exchange Commission (SEC), Division of Investment Management
Action Type ∞ No-Action Letter
Date of Issuance ∞ September 30, 2025
Targeted Entities ∞ Registered Investment Advisers (RIAs), Registered Investment Companies, Business Development Companies
Core Requirement Clarified ∞ Definition of “bank” for qualified custodian purposes under the Investment Advisers Act of 1940 and Investment Company Act of 1940
Key Condition ∞ Custody agreement must ensure segregation of client assets and protection against unauthorized use or rehypothecation.

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Outlook

This no-action letter is an important step toward regulatory clarity, paving the way for increased institutional engagement in digital assets. The SEC’s regulatory agenda for Spring 2025 includes custody rule amendments, indicating that more comprehensive rulemaking is forthcoming. Future regulations are likely to address remaining questions, such as self-custody, by balancing innovation with investor protection. This action sets a precedent for a principles-based approach to digital asset custody, potentially influencing other jurisdictions and further integrating digital assets into traditional financial systems.

The SEC’s clarification on state-chartered trust companies as qualified custodians represents a foundational advancement, solidifying the operational infrastructure for institutional digital asset participation and accelerating market maturation.

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