SEC Permits State Trust Companies as Qualified Crypto Custodians ∞ Regulation

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Briefing

The Securities and Exchange Commission (SEC) Division of Investment Management issued a no-action letter on September 30, 2025, clarifying that registered investment advisers (RIAs) and registered investment companies (RICs) may utilize state trust companies as “banks” for crypto asset custody under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. This action broadens the permissible custodial landscape for digital assets, provided RIAs and RICs adhere to rigorous due diligence, disclosure, and contractual safeguard requirements, signaling a strategic shift from an enforcement-centric approach to one focused on facilitating compliant market participation.

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Context

Prior to this no-action letter, the digital asset industry faced significant legal ambiguity regarding qualified custodianship for crypto assets under federal securities laws. The existing framework mandated that RIAs and RICs place client assets with specified institutions, typically banks, with the definition of “bank” for state trust companies often requiring a complex, facts-and-circumstances analysis. This lack of explicit clarity constrained operational models for firms seeking to offer digital asset strategies, fostering an environment where perceived non-compliance could lead to enforcement actions, as evidenced by prior SEC activity.

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Analysis

This SEC action fundamentally alters the compliance frameworks for RIAs and RICs by expanding the pool of eligible custodians for crypto assets. Regulated entities can now integrate state trust companies into their operational models, potentially enabling more diverse digital asset product structuring and investment strategies. This requires a systematic update to internal compliance protocols, focusing on verifying the state trust company’s authorization, reviewing financial and control reports, and establishing robust custodial services agreements that ensure asset segregation and prohibit unauthorized lending or pledging. The shift necessitates a renewed emphasis on risk disclosure to clients and a documented determination that the chosen custody solution serves the client’s best interest.

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Parameters

Issuing Authority ∞ U.S. Securities and Exchange Commission (SEC) Division of Investment Management
Action Type ∞ No-Action Letter
Effective Date ∞ September 30, 2025
Affected Regulations ∞ Investment Advisers Act of 1940, Investment Company Act of 1940
Targeted Entities ∞ Registered Investment Advisers (RIAs), Registered Investment Companies (RICs), State Trust Companies
Core Requirement ∞ State trust companies qualify as “banks” for crypto custody under specific due diligence and disclosure conditions

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Outlook

This no-action letter sets a significant precedent, potentially encouraging broader institutional adoption of digital assets by providing clearer pathways for compliant custody. The next phase involves firms integrating these new custodial options, which could lead to increased innovation in digital asset offerings. This action also signals a potential shift in the SEC’s broader regulatory posture, moving towards providing more guidance and clarity before enforcement, which may influence future policy developments across other digital asset categories and jurisdictions.

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Verdict

The SEC’s clarification on state trust company crypto custody is a pivotal regulatory development, establishing a pragmatic operational pathway for institutional digital asset engagement and fostering market maturation.

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