• SEC now allows state trust companies to hold crypto assets under existing federal custody rules.
• Advisers can use state trust companies to custody digital assets without facing SEC enforcement.
• The update gives more clarity for crypto asset management and expands custodian options for advisers.

The SEC of the U.S. has officially recognized the state-chartered trust companies as qualified custodians of crypto assets. The update was in the form of a no-action letter addressed to Simpson Thacher and Bartlett LLP. The decision allows investment advisers to use these trust companies for holding digital assets such as Bitcoin and Ether.

The trust companies can now be treated as banks under the Investment Advisers Act and the Investment Company Act of 1940. This makes them eligible custodians as long as they fit some criteria. The SEC pointed out that due diligence and compliance with internal controls by the advisers were required to keep client assets secure.

Regulatory Relief for Investment Advisers

The letter, published on the SEC’s official website, assures that no enforcement action will be taken against advisers using state trust companies. This position offers temporary relief under current custody rules, while the agency continues to review long-term reforms.

The Division of Investment Management confirmed that the approach helps bridge a regulatory gap. Many advisers were unsure if state-chartered trust companies met federal custody requirements. This clarification now removes that uncertainty.

Political and Industry Reactions

Lawmakers and industry members responded quickly. Some pointed to earlier efforts by states like Wyoming, which had recognized digital asset custody through trust companies years earlier. This move faced opposition at the time from federal officials. Earlier this year, Wyoming announced plans to launch the first state-issued stablecoin fully backed by US dollar reserves in July.

Now, with the SEC’s letter, state-level frameworks are gaining federal acceptance. However, not all commissioners support the shift. One commissioner raised concerns that the decision bypasses the standard rulemaking process. She argued that it gives an unfair advantage to state-chartered firms over those seeking federal charters.

Others interpret this as a viable move to match the market requirements with the changing regulations despite the criticism. Industry pundits reported that service and client protection can be enhanced by having more custodial options.

Future of Crypto Custody Rules

The SEC indicated that the relief is temporary. The agency plans to revisit custody requirements through formal rule changes. These changes could include principles-based rules aimed at modernizing standards. Moreover, the SEC withdrew the Custody Rule, Rule 3b-16, and other proposals, signaling a major regulatory shift in favor of the crypto industry in June.

Until then, the no-action position remains in place. Advisers can use state-chartered trust companies, as long as they meet legal and operational safeguards. The staff letter provides clearer guidance for fund managers handling crypto assets today.

This comes after further limitations on crypto-related banking by other federal agencies. The position of the SEC might affect the regulations of incorporating digital assets into the regulated financial systems in the future.