SEC Allows State-Chartered Trust Companies to Serve as Crypto Custodians

On September 30, 2025, the staff of the U.S. Securities and Exchange Commission’s (the Commission or SEC) Division of Investment Management (the Staff) issued a no-action letter (NAL) stating that it would not recommend enforcement action to the Commission against registered investment advisers (RIAs) or funds regulated (Regulated Funds) under the Investment Company Act of 1940, as amended (the Company Act) for maintaining crypto assets and related cash and cash equivalents with state-chartered trust companies that meet certain requirements. The Staff’s NAL is a significant departure from the previous SEC position on crypto assets and the custody of such assets. In this regard, the NAL continues an extensive amount of staff-level activity at the SEC designed to unwind positions taken by the Commission under the leadership of former chair Gary Gensler and further the goal of current chair Paul Atkins—and the broader Trump Administration—to make the United States a crypto-friendly jurisdiction.

The Custody Framework

Under Rule 206(4)-2 (the IA Custody Rule) under the Investment Advisers Act of 1940, as amended (the Advisers Act) and Sections 17(f) and 26(a) of the Company Act, the IA Custody Rule and the custody provisions of the Company Act and related rules thereunder require RIAs and Regulated Funds to use qualified custodians to maintain their securities. A “bank” constitutes a qualified custodian under the custody provisions of the Advisers Act and the Company Act. The term “bank” is defined under both the Advisers Act and the Company Act. However, prior to the Staff’s issuance of the NAL, it was unclear whether a state-chartered trust company met the definition of bank, due to the ambiguity regarding whether a substantial portion of a state-chartered trust company’s business consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Office of the Comptroller of the Currency.¹

Previous SEC Position On Custody of Crypto Assets

Under the previous administration, the Staff issued now rescinded Staff Accounting Bulletin 121 (SAB 121). In SAB 121, the Staff contended that entities responsible for safeguarding crypto assets may be subject to significant technological, legal and regulatory risks which made it appropriate for financial institutions to report as a liability on their balance sheets crypto assets held in custody on behalf of customers. SAB 121 also suggested that such financial institutions include in the notes to their financial statements certain disclosures. SAB 121 dissuaded traditional financial institutions, such as banks, from taking custody of crypto assets.

The Commission previously proposed a safeguarding rule that has since been rescinded, which would have expanded the custody rule beyond client funds and securities to include any client assets (including crypto assets) of which an RIA has custody during the previous administration. It was unclear whether state-chartered trust companies would constitute qualified custodians under the proposed safeguarding rule. Specifically, the Commission asked in the proposal whether the final rule should be changed to permit only banks or saving associations that are subject to Federal regulation and supervision to act as a qualified custodian. While the proposal did not specifically address whether a state-chartered trust company could meet the definition of qualified custodian, the Commission contended that “we must be mindful of the extent to which many of these new entrants to the custodial marketplace offer, and are regulated to provide, the types of protections we believe a qualified custodian should provide under the rule.” In addition, former chair Gary Gensler expressed his views about crypto platforms in his statement supporting the safeguarding rule. The former chair stated that “though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians.” The former chair then stated that “[m]ake no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians.” The Commission’s proposed safeguarding rule and the former chair’s statements cast doubt as to whether state-chartered trust companies could constitute qualified custodians.

Key Conditions Under the NAL

Under the NAL, state-chartered trust companies may serve as a qualified custodian so long as the state-chartered trust companies implement policies and procedures designed to safeguard crypto assets, the applicable state regulator approved the custodying of crypto assets and related cash and cash equivalents, and RIAs and Regulated Funds perform due diligence to ensure client interest is protected. Specifically, RIAs and Regulated Funds must have a reasonable basis for believing that:

• The state-chartered trust company maintains and implements written internal policies and procedures reasonably designed to safeguard crypto assets and related cash and cash equivalents with such policies and procedures addressing certain topics. The RIA or Regulated Fund, as applicable, must make this determination after receiving and reviewing the state-chartered trust company’s audited financial statements and internal control report;
• The RIA or Regulated Fund, as applicable, entered into a written custodial services agreement with the state-chartered trust company that prevents the state-chartered trust company from rehypothecating customer assets without prior written consent of the customer and requires the state-chartered trust company to segregate crypto assets and related cash and cash equivalents held in custody from its assets;
• The RIA or Regulated Fund, as applicable, disclosed the material risk associated with using state-chartered trust companies to certain persons; and
• The RIA or Regulated Fund, as applicable, determined that the use of a state-chartered trust company is in the best interest of clients or shareholders, as applicable.

Takeaway

While the NAL letter provides guidance as to the circumstances when a state-chartered trust company may maintain crypto assets and related cash and cash equivalents, the NAL should not be interpreted to suggest that the Staff have taken a position as to the status of a state-chartered trust company as a bank under the Advisers Act or the Company Act, as applicable. In addition, the NAL did not expand the definition of qualified custodian. The NAL only provided assurances that the Staff would not recommend enforcement action against an RIA or Regulated Fund for maintaining crypto assets and related cash and cash equivalents with state-chartered trust companies that meet certain requirements. It is possible that the Commission may issue a proposal that addresses custody of crypto assets and that such a proposal would incorporate some of the provisions of the NAL.

^{1 In order for a state-chartered trust company to meet the definition of bank, the following conditions must be met: (1) it must do business under the laws of any State or of the U.S.; (2) a substantial portion of its business must consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Office of the Comptroller of the Currency; (3) it must be supervised and examined by State or Federal authority having supervision over banks or saving associations; and (4) it is not operated for the purpose of evading the provisions of the Advisers Act or the Company Act, as applicable. This determination involves a facts and circumstances analysis.}