On September 30, 2025, the SEC’s Division of Investment Management offered a significant clarification regarding cryptocurrency custody, issuing a no-action letter that impacts registered investment companies and SEC-registered investment advisers. The letter indicates that the Division will not recommend enforcement action if these entities treat certain state-chartered trust companies as permissible custodians for crypto assets, provided specific conditions are met. 

This guidance addresses interpretive uncertainties arising from the Investment Company Act of 1940 and the Investment Advisers Act of 1940 concerning whether these state trust companies qualify as a “bank” for custody purposes when holding crypto assets. The no-action relief is specifically targeted at state trust companies that are organized under state law, subject to supervision and examination by a state banking authority, and authorized to exercise fiduciary powers. 

Background on Custody Requirements 

Under the 1940 Act, registered funds are generally mandated to maintain securities and similar investments with specified custodians, including banks and trust companies that meet statutory criteria. Similarly, Rule 206(4)-2 under the Advisers Act (the “Custody Rule”) requires registered investment advisers who have custody of client funds or securities to maintain those assets with a “qualified custodian,” which includes certain banks and trust companies. 

The SEC staff, in the no-action letter, acknowledged the ambiguity surrounding whether a “substantial portion” of a state trust company’s business consists of receiving deposits or exercising fiduciary powers comparable to those of national banks. However, based on the facts and representations presented, the Division stated it would not recommend enforcement action if registered funds or advisers treat a qualifying state trust company as a bank for purposes of maintaining crypto assets and related cash or cash equivalents. 

Conditions for Relief 

This relief is contingent upon adherence to several key conditions, including: 

• Due Diligence: Conducting thorough initial and ongoing due diligence to confirm the state trust company’s authority to provide crypto custody services and the adequacy of its safeguarding, key management, and cybersecurity controls. 

• Financial Review: Reviewing audited financial statements and independent internal control reports of the state trust company. 

• Custodial Agreement: Entering into a written custodial agreement that explicitly prohibits unauthorized lending or rehypothecation of assets and mandates asset segregation. 

• Risk Disclosure: Disclosing material custody-related risks to fund boards or advisory clients, as applicable. 

• Best Interest Determination: Making a reasonable determination that the custody arrangement is demonstrably in the best interest of shareholders or clients. 

Implications for Investment Advisers and Broker-Dealers 

This no-action letter provides conditional clarity for investment advisers regarding the use of specific state trust companies as qualified custodians for crypto assets under the Custody Rule. 

Advisers who currently have, or are contemplating acquiring, crypto exposure should meticulously review their custody arrangements, due diligence processes, client disclosures, and overall compliance policies to ensure complete alignment with the conditions outlined in the letter. This includes a robust assessment of the chosen state trust company’s ability to meet the stringent safeguarding requirements for digital assets.