SEC Advanced a Crypto-Spanning Adviser Custody Overhaul

The Securities and Exchange Commission voted 4–1 on February 15, 2023 to propose a sweeping replacement for its investment-adviser custody rule. The proposed safeguarding rule would have covered every asset over which a registered investment adviser had custody—not only the funds and securities addressed by the existing rule—and expressly included crypto assets.

That expansion mattered because it connected crypto custody to the institutional rules governing advisers to hedge funds, pension funds, endowments and individual clients. It also confronted a basic structural problem: much crypto trading occurred on platforms that combined execution, settlement and custody, while the SEC’s framework expected advisers to keep client assets with regulated “qualified custodians.”

This reconstructed record describes a proposal opened for public comment, not an adopted rule. The February 15 vote did not immediately disqualify a custodian, prohibit advisers from holding crypto or determine whether any particular token was a security.

What the SEC proposed

The proposal would redesignate the existing custody rule as Rule 223-1 under the Investment Advisers Act. Using authority added by the Dodd-Frank Act, it would extend safeguarding requirements from client funds and securities to all client assets in an adviser’s possession or subject to the adviser’s authority to obtain possession.

Advisers generally would need to maintain those assets with a qualified custodian, such as an eligible bank or registered broker-dealer. They would also have to enter into written agreements with custodians and obtain assurances addressing account statements, records, internal-control reports, segregation and protections against unauthorized liens.

The segregation provisions were intended to keep client property identifiable and separate from a custodian’s proprietary assets. The SEC presented that structure as protection against misuse and against claims by a custodian’s creditors during insolvency. The proposal retained independent surprise examinations in applicable circumstances while revising audit, recordkeeping and Form ADV requirements.

The initial public-comment window was set to close 60 days after publication in the Federal Register. Until the Commission considered comments and adopted final text, none of these proposed amendments carried the force of a final rule.

Why crypto posed a special problem

The proposing release said an adviser with custody of client crypto generally would need a qualified custodian to possess or control the assets throughout the custody period. It described a compliant crypto arrangement as one in which the custodian maintained the wallet’s private keys so the adviser could not change beneficial ownership without the custodian’s participation.

That standard collided with common trading practices. The SEC observed that many crypto platforms required customers to transfer assets or fiat to the platform before trading and that most such platforms were not qualified custodians. Under the proposal, an adviser using a non-qualifying platform in that manner would generally violate the safeguarding rule.

SEC Chair Gary Gensler argued that a platform’s claim to custody crypto did not make it a qualified custodian. His event-day statement emphasized segregation and the treatment of customer property when a platform entered bankruptcy. The proposal nevertheless did not make a final institution-by-institution determination about which crypto custodians qualified.

Commissioners divided over access and workability

Commissioner Hester Peirce cast the dissenting vote. She agreed that client assets required protection but argued that the proposal could expand custody requirements while reducing the number of available crypto custodians. She also questioned the compliance timetable, contractual requirements and the SEC’s assertion that most crypto assets were probably already funds or securities covered by the existing rule.

Commissioner Mark Uyeda supported publishing the proposal despite substantial reservations. He warned that the combination of custody requirements, banking regulators’ concerns about crypto exposure and doubts concerning state-chartered trust companies could make compliant advisory access to crypto difficult. His support reflected a preference for notice-and-comment rulemaking over establishing new positions primarily through enforcement.

The verified event-day conclusion was therefore limited but consequential: the SEC had formally placed all advisory crypto assets inside a proposed qualified-custodian framework, while commissioners openly disputed whether the framework would protect access or effectively constrain it.

Later context

On June 12, 2025, the SEC formally withdrew the proposal and said it did not intend to issue a final rule from that proceeding. That later decision does not alter what the Commission proposed or what institutions faced on February 15, 2023.