tl;dr
The SEC's new guidance clarifies how state-chartered trust companies can serve as crypto custodians, creating major opportunities for firms like Ripple and Coinbase to comply with federal regulations and expand their services.
**SEC Clarifies Role of State Trust Companies in Crypto Custody, Boosting Ripple and Coinbase**
On September 30, the U.S. Securities and Exchange Commission (SEC) issued a no-action letter that allows investment advisers to use state-chartered trust companies as qualified custodians for cryptocurrency assets. This move opens new opportunities for digital asset firms like Ripple and Coinbase, enabling them to serve registered funds under federal regulations.
The guidance clarifies the definition of “bank” under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, resolving longstanding uncertainty about whether state-chartered trust companies meet the criteria for qualified custodians. Brian Daly, Director of the SEC’s Division of Investment Management, noted that the clarity was necessary because “state-chartered trust companies were not universally seen as eligible custodians for crypto assets.”
Under the current framework, investment advisers are required to safeguard client assets through qualified custodians, typically banks or trust companies with national fiduciary powers. The new guidance expands this definition to include state-chartered trust companies, provided they meet specific regulatory standards.
**Ripple, Coinbase, and the Path to Compliance**
Firms such as Ripple and Coinbase, which operate as state-chartered trust companies, now have a clearer path to becoming recognized custodians for crypto assets. Previously, these companies faced scrutiny over their eligibility under federal custody rules.
Bloomberg ETF analyst James Seyffart praised the letter as “a textbook example of more clarity for the digital asset space” and highlighted its alignment with industry demands. “This is exactly the sort of thing the industry was asking for over the last few years,” he said.
**Key Requirements for Custodians**
The SEC’s guidance outlines stringent requirements for state-chartered trust companies seeking to serve as qualified custodians:
- **Annual Reviews**: Advisers must confirm that custodians have policies in place to protect crypto assets from theft, loss, or misappropriation.
- **Financial Compliance**: Custodians must provide audited financial statements prepared under Generally Accepted Accounting Principles (GAAP) and internal control reports from independent accountants.
- **Custodial Agreements**: These must prohibit lending, pledging, or rehypothecating crypto assets without client consent and mandate the segregation of client assets from the custodian’s balance sheet.
The guidance applies to state trust companies authorized by state banking authorities to offer crypto custody services. These institutions operate under comprehensive regulatory frameworks, including licensing requirements, minimum capital standards, and periodic examinations.
**A Step Forward, With Room for Expansion**
Daly emphasized that the guidance addresses “today’s products, today’s managers, and today’s issues.” However, he noted that the SEC could revisit the topic through future rulemaking.
The decision marks a pivotal moment for the crypto industry, bridging regulatory gaps and fostering innovation. As digital asset adoption grows, the SEC’s clarity on custodial standards is likely to accelerate the integration of cryptocurrencies into traditional financial systems.