SEC permits trust companies to custody cryptoassets

The SEC indicated it would permit registered funds and advisers to use state trust companies to custody cryptoassets.

Details: The SEC last week released a letter stating that it “would not recommend enforcement action to the Commission under the Custody Provisions against a Registered Adviser or Regulated Fund for treating a State Trust Company as a ‘bank’ with respect to the placement and maintenance of Crypto Assets and Related Cash and/or Cash Equivalents.”

Change in Policy: The SEC in 2023 released an expansive proposal that questioned whether the definition of “bank” as a “qualified custodian” should be narrowed to only members of the Federal Reserve System or only those subject to federal regulation and supervision. ICBA asked for the definition to be limited to only banks with FDIC insurance, but the proposal was withdrawn over the summer.

Reaction: SEC Commissioner Caroline Crenshaw criticized the no-action letter, raising concerns that state trust companies, in contrast to banks, are “subject to an inconsistent hodgepodge of less rigorous rules and less oversight.” She pointed out that the letter allows state trust companies to bypass the entire OCC application process for national trust charters and said that a change of this magnitude should have occurred with the normal rulemaking and public comment process.

Recent Cryptoasset Actions:

• The federal banking agencies in July issued a joint statement to provide clarity on banks' engagement in cryptoasset-related activities, highlighting potential risk-management considerations related to holding cryptoassets on customers' behalf.

• President Donald Trump’s Working Group on Digital Asset Markets in July released recommendations for digital financial technology.