**SEC Opens Door for Investment Advisers to Use State Trusts as Crypto Custodians**

The U.S. Securities and Exchange Commission has taken a significant step forward in clarifying crypto custody regulations by issuing guidance that allows investment advisers to use state-chartered trust companies as qualified custodians for digital assets. This development marks a pivotal moment for the cryptocurrency industry and addresses longstanding regulatory uncertainty that has plagued investment advisers seeking to offer crypto services to their clients.

## **Major Policy Shift Under New Leadership**

The SEC’s Division of Investment Management issued a no-action letter on September 30, 2025, stating that the agency would not pursue enforcement actions against registered advisers or regulated funds that use state-chartered trust companies to hold crypto assets. This represents a dramatic departure from the policies of former SEC Chair Gary Gensler, who had previously sought to restrict which entities could serve as crypto custodians for regulated investment advisers.

Under the new leadership of Chairman Paul Atkins, who has prioritized establishing crypto-friendly industry policies as directed by President Trump, the SEC is pursuing a more accommodating approach toward digital assets. This shift reflects the agency’s recognition that the previous regulatory ambiguity was creating unnecessary barriers for legitimate financial services firms.

## **Addressing the “Bank” Definition Question**

The core issue that the no-action letter resolves centers on whether state-chartered trust companies meet the definition of a “bank” under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. Both statutes require investment advisers to maintain client assets with qualified custodians, which are typically defined as banks or trust companies with national fiduciary powers.

Brian Daly, Director of the SEC’s Division of Investment Management, explained that this additional clarity was necessary because state-chartered trust companies were not universally recognized as eligible custodians for crypto assets. The guidance now explicitly treats state trust companies as banks for custody purposes, removing a significant regulatory obstacle.

## **Major Winners in the Crypto Space**

This regulatory clarification positions several prominent cryptocurrency companies to become recognized qualified custodians. Companies like Coinbase, Ripple, and Kraken, which operate state-chartered trust subsidiaries, now have a clear path to serve as custodians for registered investment funds and advisers.

The benefits extend beyond individual companies to the broader crypto ecosystem. Investment advisers who previously faced uncertainty about custody options now have access to a wider range of qualified custodians, potentially making it easier and more cost-effective to offer crypto investment services to their clients.

Bloomberg ETF analyst James Seyffart characterized the letter as **”a textbook example of more clarity for the digital asset space”** and exactly what the industry has been requesting for years. This sentiment reflects the widespread frustration that had built up around custody requirements, which many viewed as unnecessarily restrictive.

## **Regulatory Requirements and Protections**

While the no-action letter provides welcome clarity, it also establishes specific requirements that custodians must meet. Investment advisers must conduct annual reviews to confirm that state trust companies maintain adequate policies to protect crypto assets from theft, loss, and misappropriation.

The guidance requires custodians to provide audited financial statements prepared under Generally Accepted Accounting Principles and internal control reports from independent accountants. Additionally, custodial agreements must include provisions that prohibit lending, pledging, or rehypothecating crypto assets without explicit client consent, and they must require the segregation of client assets from the custodian’s own balance sheet.

These requirements ensure that the expanded custody options don’t come at the expense of investor protection. State trust companies must still operate under comprehensive regulatory frameworks that include licensing requirements, minimum capital standards, regular examinations, and enforcement mechanisms for non-compliance.

## **Political and Industry Reactions**

The announcement received positive reactions from crypto-friendly lawmakers. Senator Cynthia Lummis praised the SEC’s recognition of state-chartered trust companies as qualified digital asset custodians, noting that Wyoming had pioneered this approach in 2020 when it issued similar no-action relief, despite criticism from SEC staff at the time.

However, the decision wasn’t universally welcomed within the SEC itself. Democratic Commissioner Caroline Crenshaw issued a statement opposing the no-action treatment, arguing that the SEC was effectively treating crypto assets differently from other financial instruments and ignoring efforts by firms to pursue federal chartering through the Office of the Comptroller of the Currency.

Commissioner Hester Peirce, known for her crypto-friendly stance, supported the move but suggested that the agency should consider broader updates to custodian rules that would recognize technologically sophisticated companies’ ability to custody assets safely.

## **Looking Forward**

This no-action letter represents more than just technical guidance; it signals the SEC’s evolving approach to cryptocurrency regulation under new leadership. While the letter doesn’t constitute formal rulemaking, it carries sufficient regulatory weight to address immediate compliance concerns for investment advisers and their clients.

The guidance addresses current market realities and acknowledges that state-chartered trust companies operating within established regulatory frameworks can provide adequate protection for crypto assets. As Director Daly noted, the guidance addresses **”today’s products, today’s managers, and today’s issues,”** though the SEC may address the topic through formal rulemaking in the future.

For the cryptocurrency industry, this development removes a significant regulatory barrier and provides much-needed clarity for investment advisers seeking to expand their digital asset offerings. As the regulatory landscape continues to evolve under the Trump administration’s pro-crypto policies, this no-action letter may be remembered as a turning point that helped legitimize cryptocurrency custody services within the traditional financial regulatory framework.

The move also demonstrates how regulatory policy can adapt to technological innovation while maintaining investor protection standards, potentially serving as a model for future crypto-related guidance from federal financial regulators.