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The SEC has taken a significant step that could reshape how investment advisers manage crypto assets for their clients. In a recent update, the SEC’s Division of Investment Management issued a no-action letter, indicating that it would not recommend enforcement action against investment advisers who use state-chartered trust companies as custodians for cryptocurrency holdings. This means that, provided certain safeguards are met, registered advisers can now work with these trust companies to hold crypto assets—such as Bitcoin and Ether—alongside traditional assets like cash and securities.

This move addresses a longstanding uncertainty in the industry, where advisers were unsure if state trust companies qualified as “qualified custodians” under federal rules. The Investment Advisers Act of 1940 and the Investment Company Act of 1940 require that client assets be held with a “qualified custodian,” but it was not always clear if state trust companies met the definition of a “bank” for this purpose. The SEC’s guidance now clarifies this point, paving the way for more firms, including those operating as state-chartered trust companies, to enter the crypto custody space.

Advisers must still conduct due diligence, confirm that custodians have robust policies to safeguard assets, and review audited financial statements. Custody agreements must also protect client interests—for example, by prohibiting the lending or pledging of assets without client consent and requiring the segregation of client assets from the custodian’s own holdings. The SEC stresses that this is an interim step toward broader modernization of custody rules, reflecting the evolving nature of digital asset markets.

The decision has been met with broad approval from industry participants, who see it as a much-needed clarification that will encourage adoption and innovation. Analysts and lawmakers have noted that this aligns with earlier state-level efforts, such as those in Wyoming, to create regulatory frameworks for digital asset custodians.

In summary, the SEC’s no-action letter opens the door for investment advisers to use state trust companies as crypto custodians, provided they adhere to prescribed safeguards. This decision is expected to expand the range of custody options available to advisers and their clients, while laying the groundwork for future updates to federal custody requirements as the digital asset landscape continues to mature.