SEC Staff Permits State Trust Companies as Digital Asset Custodians ∞ Regulation

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Briefing

On September 30, 2025, the U.S. Securities and Exchange Commission’s Division of Investment Management issued a no-action letter, confirming that registered investment advisers (RIAs) and registered investment companies may treat certain state-chartered trust companies as “banks” for purposes of maintaining custody of crypto-assets and related cash or cash equivalents. This action provides essential clarity, expanding the pool of permissible qualified custodians under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, subject to rigorous due diligence and operational safeguards. The relief is conditioned on advisers and funds ensuring the trust company adheres to specific investor protection obligations, including robust policies, financial transparency, and segregated asset custody.

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Context

Prior to this no-action letter, significant ambiguity existed regarding whether state-chartered trust companies met the definition of a “bank” under federal securities laws, which is a prerequisite for acting as a qualified custodian for digital assets. This uncertainty created a prevailing compliance challenge for RIAs and registered funds seeking to engage in digital asset strategies, as it limited their options for secure and compliant custody, often forcing reliance on less clear interpretations or inhibiting market participation. The industry had long sought definitive guidance to reconcile the innovative nature of digital asset custody with established investor protection frameworks.

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Analysis

This no-action relief directly alters the operational requirements for RIAs and registered funds by expanding their options for digital asset custody. It provides a clear pathway for integrating state-chartered trust companies into their compliance frameworks, thereby mitigating a significant regulatory risk. Firms must now update their due diligence protocols to assess trust companies’ capabilities and ensure adherence to mandated investor protection safeguards, including robust internal controls and asset segregation.

This development streamlines product structuring for digital asset offerings and enhances market access by providing a more defined and compliant custody infrastructure, ultimately fostering greater institutional participation in the digital asset ecosystem. The action sets a precedent for a principles-based approach to custody, focusing on investor protection outcomes rather than prescriptive technology requirements.

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Parameters

Issuing Authority ∞ U.S. Securities and Exchange Commission (SEC) Division of Investment Management
Regulatory Action ∞ No-Action Letter
Date of Issuance ∞ September 30, 2025
Targeted Entities ∞ Registered Investment Advisers (RIAs), Registered Investment Companies (funds/BDCs)
Affected Rule ∞ Rule 206(4)-2 under the Investment Advisers Act of 1940 (Custody Rule)
Key Condition ∞ State-chartered trust companies must provide audited financial statements and SOC-1 reports, and custody agreements must ensure asset segregation.

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Outlook

This no-action letter is an important step towards establishing a more robust and clear regulatory framework for digital asset custody in the United States. It signals a pragmatic approach from the SEC, recognizing the evolving landscape of digital asset service providers. While this relief addresses a critical aspect of custody, the SEC’s spring 2025 regulatory agenda indicates that more comprehensive custody rule amendments are anticipated, likely to further address remaining questions such as self-custody.

This action could set a precedent for other jurisdictions by demonstrating a principles-based approach to custody, balancing innovation with investor protection. The enhanced clarity is expected to encourage greater institutional adoption and investment in digital asset strategies.

The SEC’s no-action relief decisively advances regulatory clarity for digital asset custody, solidifying a compliant pathway for institutional engagement and fostering maturation of the industry’s legal standing.

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