Briefing
The U.S. Securities and Exchange Commission’s (SEC) Division of Investment Management issued a no-action letter clarifying that Registered Investment Advisers (RIAs) and regulated funds may treat qualifying state-chartered trust companies (STCs) as “banks” for crypto asset custody under the Advisers Act and the Investment Company Act. This action immediately provides a compliant pathway for institutional capital to enter the digital asset space, resolving a long-standing legal ambiguity that previously restricted the use of non-federal entities for this critical function. The relief is explicitly conditioned on stringent due diligence, including the requirement for the RIA or fund to verify the STC’s state authorization for crypto custody and review its audited financial statements and SOC-1/SOC-2 reports. This pivotal regulatory shift was formalized on September 30, 2025.
Context
Prior to this guidance, the custody of digital assets for regulated entities was a significant compliance bottleneck, primarily due to the narrow definition of a “qualified custodian” under the Investment Advisers Act Rule 206(4)-2. This definition largely restricted custody to federal or state-chartered banks with FDIC insurance or registered broker-dealers, categories that many specialized crypto custodians, including state-chartered trust companies, did not neatly fit. This ambiguity forced RIAs to either avoid crypto assets or navigate complex, high-risk compliance workarounds, creating a systemic barrier to institutional engagement and fostering an environment of regulatory uncertainty.
Analysis
The no-action letter fundamentally alters the operational compliance framework for RIAs and funds by integrating state-level crypto custody expertise into the federal regulatory structure. This creates a direct cause-and-effect chain ∞ RIAs can now leverage the specialized security and cold storage solutions developed by STCs, which were previously inaccessible under the “qualified custodian” rule. The critical requirement is the mandatory due diligence and ongoing oversight, compelling RIAs to update their risk management and third-party vendor review protocols to include verification of the STC’s state authorization and its segregation of client assets. This effectively shifts the compliance burden from determining who can custody to demonstrating how the custody is performed, making operational resilience a core compliance metric.
Parameters
- Regulatory Instrument ∞ No-Action Letter
- Governing Acts ∞ Investment Advisers Act of 1940 and Investment Company Act of 1940
- Core Requirement ∞ Custody agreement must mandate segregation of client crypto assets from the custodian’s proprietary assets
- Key Date ∞ September 30, 2025 (Date the SEC Division of Investment Management issued the letter)
Outlook
This no-action position, coupled with the prior rescission of SAB 121, sets a powerful precedent for regulatory pragmatism and signals the SEC’s shift toward an accommodating policy. The next phase will involve the industry’s response to the SEC’s broader proposed rulemaking on the custody rule, which is still on the regulatory agenda. This targeted relief may reduce the urgency for that comprehensive rulemaking, but it will accelerate the institutionalization of crypto by providing a clear, compliant custody solution, potentially leading to a surge in Registered Fund filings for digital asset products. The precedent also pressures other federal regulators to align their custody definitions with this new, more flexible standard.
Verdict
The SEC’s no-action relief is a strategic inflection point that immediately validates state-level crypto expertise and unlocks the institutional custody pipeline, establishing a clear, auditable compliance path for major financial market entry.
