SEC allows investment advisers to use chartered trust companies as crypto custodians

The US SEC is allowing investment advisors to rely on chartered trust companies as crypto custodians.  

This means that any officially approved or licensed trust company can hold cryptocurrencies like Bitcoin or Ether in the same way they hold hard cash or other assets.

The American financial watchdog disclosed the update in a letter sent to Simpson Thacher & Bartlett LLP, a law firm that reached out to the SEC, seeking clarification.

SEC supports state-trusts as crypto custodians

The Securities and Exchange Commission stated in the letter that trust companies may be treated as “banks.” The approach works under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. State-chartered trust companies are now eligible to hold crypto assets on behalf of their clients. 

The SEC shared the letter and analysis on its website. The agency wrote,

“…any Registered Adviser that has custody of client funds or securities maintain those funds and securities with a qualified custodian, where “qualified custodian” is defined to include “a bank as defined in Section 202(a)(2) of the Advisers Act.” 

The SEC letter is classified as a no-action letter, meaning that the agency will not take enforcement action if advisers or funds use state trust companies to hold crypto assets.

Senator Cynthia Lummis posted on X and said that she is “encouraged to see @SECGov recognizing state-chartered trust companies as qualified digital asset custodians.” She reminded people of how Wyoming paved the way for this decision when it issued a no-action relief in 2020 and was criticized back then by SEC employees. She said, “They finally recognized the rigor & value of WY’s digital asset supervision.”

Brian Daly, Director of the SEC’s Division of Investment Management, told Eleanor Terrett that, “This additional clarity was needed because state-chartered trust companies were not universally seen as eligible custodians for crypto assets.”

Daly explained that the letter to Simpson Thacher & Bartlett is a staff letter. He said the topic could be brought up in future rulemaking, but for now, it works and provides clear guidance for today’s products and managers.

The decision taken by the SEC staff is a turning point, especially after the Federal Reserve and the Treasury Department restricted how banks and regulated entities could work with crypto firms in what is known as Operation Choke Point 2.0.

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