Briefing
The U.S. Securities and Exchange Commission’s Division of Investment Management issued a No-Action Letter confirming it will not recommend enforcement against registered Investment Advisers and Funds that utilize certain State Trust Companies as custodians for crypto assets. This guidance effectively treats these state-regulated entities as “banks” under the Investment Advisers Act of 1940’s custody rule, resolving a critical compliance bottleneck that previously restricted institutional participation. The primary consequence is the immediate expansion of the qualified custodian pool, enabling a clearer path for SEC-regulated funds to hold digital assets, with the letter formally issued on September 30, 2025.
Context
Prior to this staff guidance, the core challenge for SEC-registered Investment Advisers operating under Rule 206(4)-2 of the Advisers Act was the narrow definition of a “qualified custodian,” which largely excluded non-bank state trust companies that had emerged as specialized digital asset custodians. This legal gap forced many funds to either avoid holding crypto assets or rely on complex, often state-by-state, legal interpretations, creating systemic operational and legal risk due to the lack of clear federal recognition for non-traditional custodians.
Analysis
This staff guidance fundamentally alters the operational architecture for institutional crypto funds by providing a defined compliance pathway. Advisers must now update their due diligence and custodial agreements to ensure the State Trust Company meets all specified conditions, including the statutory requirement for full segregation of client assets from the custodian’s own balance sheet. The ability to use these specialized custodians lowers the barrier to entry for institutional managers, which will drive new product structuring and accelerate the tokenization of traditional assets. The legal risk associated with custody is substantially mitigated, which is a critical step in integrating digital assets into the established securities regulatory perimeter.
Parameters
- Issuing Body → SEC Division of Investment Management (The Letter was issued by the SEC Division of Investment Management.)
- Governing Statute → Investment Advisers Act of 1940 (The custody rules are under the Investment Advisers Act of 1940.)
- Core Requirement → Client Asset Segregation (Custody agreement must mandate segregation of client crypto assets from the state trust company’s own assets.)
- Date of Letter → September 30, 2025 (The Letter was issued on September 30, 2025.)
Outlook
The SEC has signaled it is considering formal rulemaking on this topic, suggesting the No-Action Letter is an interim measure that will eventually be codified into a permanent rule. The immediate effect is a competitive advantage for state-chartered trust companies, positioning them as the preferred institutional custodians until national banks fully enter the space. This staff position sets a strong precedent for recognizing specialized, state-level financial entities in the federal digital asset custody landscape, signaling a pragmatic, risk-based approach to institutional adoption.
Verdict
This No-Action Letter provides essential regulatory clarity for institutional custody, structurally de-risking the holding of digital assets for SEC-registered investment funds and accelerating market maturation.
