The SEC’s Division of Investment Management has issued a no-action letter effectively clarifying that federally registered investment advisers can utilize a State Trust Company to hold clients’ crypto assets. Following the issuance of the no-action letter, Commissioner Hester Pierce wisely observed, “Regulatory gray zones can harm investors” and commended the staff’s clarification as something that would serve to benefit advisory clients and fund investors. [1]
Indeed, regulatory uncertainty can harm investors and often impedes financial and technological innovation. An example has been the assessment of which types of institutions may serve as “qualified custodians” for crypto assets managed by investment advisers. Throughout this year, the SEC has taken a few steps to expand the base of crypto asset custodians available to investment advisers with the most recent being its no-action letter as to State Trust Companies. [2]
Key Background
The SEC’s custody rules have long required investment advisers to maintain client funds and securities with a “qualified custodian.” This requirement has proven difficult to reconcile with digital asset custody, where safeguarding client assets often means controlling cryptographic private keys, ensuring on-chain segregation, and addressing unique insolvency and cybersecurity risks. The number of eligible firms that can comply with the limitations imposed by the federal and state regulatory framework has not kept pace with client and investor demand for crypto assets.
In earlier years, the SEC offered little practical guidance for firms that are generally considered to be qualified custodians. A 2019 joint statement between the SEC and FINRA described the challenges of applying the Exchange Act’s Customer Protection Rule to crypto asset securities, emphasizing that their novel features made it difficult for broker-dealers to custody them at recognized “good control locations” (such as the Depository Trust Company) or to capture them accurately in required records[3]. Although the statement stopped short of banning custody, it stressed that non-custodial models carried fewer risks, effectively discouraging broker-dealers from holding crypto assets directly. The staff also cautioned that certain crypto assets might fall outside the scope of the Securities Investor Protection Act (SIPA), potentially leaving investors unprotected if a broker-dealer failed.
Other SEC staff interpretations, such as the accounting guidance in SAB 121,[4] created additional barriers by requiring custodians to record digital assets held for customers as liabilities on their balance sheets.
Earlier this year, the SEC began taking steps to reduce regulatory constraints on crypto asset custody for potential custodians. In January 2025, the SEC replaced SAB 121 with SAB 122[5], removing the requirement for firms to recognize crypto assets held for clients as balance sheet liabilities and only requiring firms to make clear disclosures in their financial statements regarding the nature and amount of assets held, concentrations, and the risks of safeguarding them. Then, in May 2025, the SEC withdrew the aforementioned Joint Statement[6].
The No Action Letter
Against this backdrop, the SEC’s Division of Investment Management issued its recent no-action letter addressing custody of crypto assets by State Trust Companies. Although State Trust Companies are indirectly included in the list of “qualified custodians” for purposes of the Investment Advisers Act of 1940, to be eligible as a qualified custodian a State Trust Company “a substantial portion of [its] business must consist of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the OCC.”
No-action relief was sought due to the uncertainty and necessary “facts and circumstances” analysis of whether a “substantial portion” of a given State Trust Company’s business consists of receiving deposits or exercising “fiduciary powers similar to those permitted to national banks under the authority of the [OCC].” The request for relief highlighted key practices employed by State Trust Companies and relevant safeguards.
In response, Investment Management responded that it would not recommend enforcement action if advisers or funds maintain crypto assets, and related cash, with State Trust Companies as a “bank”, provided that the adviser or fund must:
- Verify authorization and safeguards. Confirm the State Trust Company is licensed by the relevant state banking authority and maintains policies to protect crypto assets and related cash, including private key management and cybersecurity.
- Review financial and control reports. Examine the company’s latest audited financial statements and independent internal control reports (e.g., SOC-1/SOC-2) to ensure controls are properly designed and operating effectively.
- Execute a custodial agreement. Ensure a written agreement specifies that crypto assets and related cash are segregated from the State Trust Company’s assets and cannot be lent, pledged, or hypothecated/rehypothecated without client consent.
- Disclose risks. Inform clients or fund boards of material risks associated with using the State Trust Company for custody.
- Act in the best interest. Conclude that using the State Trust Company is in the best interest of clients, the funds, or fund shareholders.
Practical Implications
The SEC has demonstrated a clear interest in removing hurdles to the adoption of crypto assets. As with all no-action letters, the recent letter does not expand the statutory definition of “qualified custodian.” Accordingly, state-registered investment advisers should still proceed with caution before utilizing a State Trust Company as a custodian for clients’ crypto assets. Even if the state’s definition of a “qualified custodian” is based on the federal definition, the state might still claim that, technically, a particular State Trust Company is not a qualified custodian. To that end, we encourage state-registered investment advisers to confer with counsel to discuss the SEC no-action position and the relevant states’ positions regarding the same.
Moreover, investment advisers and private funds should remain circumspect when determining their practices associated with crypto assets. Proper diligence, documentation, and informed consideration of risks are essential.
[1] https://www.sec.gov/newsroom/speeches-statements/peirce-statement-custody-crypto assets-093025
[2] https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-investment-management-staff-no-action-interpretive-letters/simpsonthacherbartlett093025
[3] https://www.sec.gov/newsroom/speeches-statements/joint-staff-statement-broker-dealer-custody-digital-asset-securities
[4] https://www.sec.gov/rules-regulations/staff-guidance/staff-accounting-bulletins/staff-accounting-bulletin-121
[5] https://www.sec.gov/rules-regulations/staff-guidance/staff-accounting-bulletins/staff-accounting-bulletin-122
[6] https://www.sec.gov/newsroom/speeches-statements/withdrawal-joint-staff-statement-broker-dealer-custody-digital-asset-securities