SEC Staff Grants No-Action Relief For Certain State-Chartered Crypto Custodians

Key Takeaways

• The Staff of the SEC's Division of Investment Management will not recommend enforcement action if registered investment advisers and 1940 Act-regulated funds treat state trust companies (STCs) as "banks" for purposes of providing custody of crypto assets and cash and/or cash equivalents reasonably necessary to effect transactions in crypto assets.
• This is the first Staff position expressly permitting registered advisers and registered funds to use STCs to custody crypto assets. The position is specifically limited to crypto assets and related cash and/or cash equivalents and is subject to several conditions.
• To use an STC as a crypto custodian and rely on the relief, registered advisers and regulated funds must (among other conditions) perform initial and ongoing annual due diligence on the STC assessing private key management and cybersecurity and determine that STC custody is in the best interests of clients and shareholders.
• The relief provides more regulatory clarity on the universe of institutions that are eligible to custody crypto assets for registered investment advisers and regulated funds and comes at a time when the SEC is considering broader rulemaking on crypto custody.
• The Staff did not take a position with respect to other aspects of applicable custody requirements (e.g., surprise exam or annual audit requirements for investment advisers).

The Custody Puzzle in Crypto Markets

Custody requirements for client assets have long been a cornerstone of U.S. securities regulation. Both the Advisers Act and the 1940 Act and/or the rules thereunder generally require that client and fund assets be maintained with custodians meeting certain conditions, including "banks." For decades, the custody infrastructure for traditional securities has been stable and generally well-understood.

Crypto Assets,¹ however, do not neatly fit within the existing custody infrastructure. Unlike traditional securities, Crypto Assets exist as digital tokens recorded on distributed ledgers, raising novel issues around safekeeping, key management and technology controls. While investor demand for Crypto Assets has grown, uncertainty regarding the applicability of securities and custody regulations to such assets has slowed traditional custodians' involvement in the crypto markets. Moreover, until recently, registered broker-dealers and banks faced significant regulatory constraints when seeking to provide crypto-asset safekeeping. For example, until May 2025, broker-dealers were restricted from custodying non-crypto assets, and banks have been hesitant or unable to provide crypto custody services amid skeptical and then-shifting supervisory expectations from federal regulators.²

Amidst this regulatory uncertainty, many crypto market participants have turned to state trust companies ("STCs"), entities chartered and supervised under state law, to fill the gap. Several states have created licensing regimes for crypto asset custody, and a number of STCs have developed robust cold storage, cybersecurity and audit frameworks to meet institutional demands. Despite these measures, uncertainty has persisted as to whether STCs qualify as "banks" under the Advisers Act and the 1940 Act and/or the rules thereunder for custody purposes. In 2020, the staff of the SEC's Division of Investment Management (the "Staff") sought comment on whether STCs should be considered "qualified custodians" under the Advisers Act but did not take any further action on this question — until now.³

The No-Action Letter

On September 30, 2025, the Staff responded to a request for no-action relief made on behalf of investment advisers registered under the Advisers Act ("Registered Advisers") and issuers registered as investment companies under the 1940 Act, or that have elected to be regulated as business development companies under the 1940 Act (such issuers, collectively, "Regulated Funds"). The request asked the Staff to confirm that it would not recommend enforcement action against Registered Advisers and Regulated Funds treating STCs as "banks" under the Advisers Act and 1940 Act custody provisions (the "No-Action Letter").⁴

In considering the request, the Staff observed that STCs operate under state regulatory frameworks that provide for, among other provisions, eligibility requirements and licensing, supervision, examination, and enforcement by state regulatory authorities, minimum capital and balance sheet requirements, activity restrictions and periodic reporting and recordkeeping requirements. The Staff also noted that STCs have implemented sophisticated controls to ensure safekeeping of Crypto Assets, such as "deep cold storage" of assets, annual independent audits, SOC-1 and SOC-2 reports, cybersecurity, physical security, and business continuity policies and procedures, complex encryption protocols and Crypto Asset movement verification controls, and policies and procedures concerning private key generation and storage.

After discussing the current state of crypto custody practices at STCs, the Staff stated that it would not recommend enforcement action against Registered Advisers under Rule 206(4)-2 under the Advisers Act or against Regulated Funds under Sections 17(f) and 26(a) of the 1940 Act if such Registered Advisers or Regulated Funds rely on STCs for custody of Crypto Assets and cash and/or cash equivalents reasonably necessary to effect transactions in Crypto Assets ("Related Cash and/or Cash Equivalents"), provided that the following conditions are met:

1. Initial and Ongoing Annual Diligence
   • Prior to engaging the STC and on an annual basis, the Registered Adviser or Regulated Fund, as applicable, has a reasonable basis, after due inquiry, for believing that:
     • the STC is authorized by the relevant state banking authority to provide custody services for Crypto Assets and Related Cash and/or Cash Equivalents; and
     • the STC maintains and implements written internal policies and procedures reasonably designed to safeguard Crypto Assets and Related Cash and/or Cash Equivalents from the risk of theft, loss, misuse, and misappropriation, with such policies and procedures addressing, among other topics, private key management and cybersecurity. In making this determination, the Registered Adviser or Regulated Fund:
       • receives and reviews the STC's most recent annual financial statements and confirms that such financial statements have been subject to an audit by an independent public accountant and have been prepared in accordance with Generally Accepted Accounting Principles (GAAP); and
       • receives and reviews the STC's most recent written internal control report prepared by an independent public accountant during the current or prior calendar year (e.g., SOC-1 report or SOC-2 report) and confirms that such internal control report contains an opinion of such independent public accountant that controls have been placed in operation as of a specific date and are suitably designed and are operating effectively to meet control objectives relating to custodial services, including the safeguarding of Crypto Assets and Related Cash and/or Cash Equivalents during the year.
2. Written Custody Agreement
   • The Registered Adviser or Regulated Fund, as applicable, enters into, or causes its client to enter into, as applicable, a written custodial services agreement with the STC, which provides that:
     • the STC will not, directly or indirectly, lend, pledge, hypothecate, or rehypothecate any Crypto Assets (or Related Cash and/or Cash Equivalents) held in custody for the client or Regulated Fund, as applicable, without the prior written consent of the client or Regulated Fund, and then only for the account of such client or Regulated Fund; and
     • all Crypto Assets (and Related Cash and/or Cash Equivalents) held in custody for the client or Regulated Fund, as applicable, will be segregated from the STC's assets.
3. Risk Disclosure
   • The Registered Adviser discloses to its clients or the Regulated Fund discloses to the members of its board of directors or trustees any material risks associated with using STCs as custodians of Crypto Assets (and Related Cash and/or Cash Equivalents).
4. Best-Interest Determination
   • The Registered Adviser (with respect to its client) or the Regulated Fund (and, as applicable, its board of directors or trustees), reasonably determines that the use of the STC's custody services is in the best interest of the client or Regulated Fund and its shareholders, as applicable.

The Staff emphasized that this relief is fact-specific, does not alter the underlying statutes or rules governing custody of Regulated Fund or Registered Adviser client assets and is limited to Crypto Assets and Related Cash and/or Cash Equivalents.

Legal and Practical Implications

More Clarity for Advisers and Funds

The Staff's response allows Registered Advisers and Regulated Funds to treat STCs as "banks" and, therefore, appropriate custodians for Crypto Assets, provided that the No-Action Letter's conditions are met. For Registered Advisers and Regulated Funds seeking to implement crypto strategies, the No-Action Letter provides a clearer framework to utilize STCs without material SEC enforcement risk. It also points toward the direction that the SEC is likely to take in future rulemaking on crypto custody.

Some Registered Advisers, it should be noted, have already been using STCs as custodians for Crypto Assets on the basis of their conclusion that STCs meet the definition of bank under the Advisers Act. The Staff acknowledges that the treatment of STCs as banks depends on a facts and circumstances analysis. Accordingly, a Registered Adviser and/or Regulated Fund that has previously come to the conclusion that a particular STC is a bank should not view the No-Action Letter as casting doubt on that conclusion. Nonetheless, such Registered Advisers and Regulated Funds may find it helpful to review the conditions specified for the grant of no-action relief and move their practices into line with the No-Action Letter, to the extent they are not already.

Heightened Diligence Expectations

The Staff's conditions help formalize the diligence many Registered Advisers were already performing. Measures like reviewing audits, control reports and custody agreements likely will now be an expected part of onboarding and monitoring STCs. In addition, the Staff's discussion of the controls currently in use by STCs (e.g., "deep cold storage") provides useful guidance as to controls Registered Advisers and Regulated Funds may want to pay close attention to as they perform diligence on STCs. Guidance from federal banking regulators on steps banks should take when safekeeping Crypto Assets may also be helpful in this regard.⁵

The No-Action Letter is also premised on STCs operating under state regulatory frameworks that regulate eligibility requirements and licensing, supervision, examination, and enforcement by state regulatory authorities, minimum capital and balance sheet requirements, activity restrictions and periodic reporting and recordkeeping requirements. To the extent an STC operates under a state regulatory regime that is materially different, the applicability of the No-Action Letter to such STCs may be open to question.

Regulatory Direction

While helpful, the No-Action Letter is still narrow in scope. It does not permit Registered Advisers or Regulated Funds to treat all STCs as banks, or to treat STCs as banks with respect to all types of assets. Rather, the No-Action Letter responds to a specific market need with a tailored no-action position. Importantly, the no-action position only allows Registered Advisers and Regulated Funds to treat STCs as banks for Crypto Assets and Related Cash and/or Cash Equivalents and does not provide relief from any other aspect of the relevant custody rules. For example, to the extent a Registered Adviser has custody over client funds or securities held at an STC, the Registered Adviser will be required to comply with the surprise examination or audit requirements of Rule 206(4)-2 under the Advisers Act. Additionally, custody of Crypto Assets is on the SEC's recently published regulatory flexibility agenda.⁶ Accordingly, the no-action position should be viewed as an interim step while the SEC considers a more permanent, rules-based regime.⁷

Market Impact

Registered Advisers and Regulated Funds now have a clearer path to integrate Crypto Assets into portfolios while remaining compliant with the custody rules. Accordingly, we expect that an increasing number of Registered Advisers and Regulated Funds will incorporate Crypto Assets into portfolios, furthering the mainstream adoption of this asset class.

Conclusion

The Staff's no-action position offers more clarity for Registered Advisers and Regulated Funds navigating the evolving landscape of Crypto Asset custody. The No-Action Letter follows closely on FAQs from the staff of the SEC's Division of Trading and Markets stating that broker-dealers may custody crypto asset securities as well as crypto assets that are not securities,⁸ and clarifications from the Office of the Comptroller of Currency confirming that a bank may buy and sell crypto assets held in custody on a customer's behalf at the direction of the customer and in a manner consistent with the customer agreement and applicable law.⁹ The cumulative effect of these regulatory actions is to significantly expand the universe of crypto asset custodians.

By recognizing the role of STCs in the market, the Staff has widened a route towards the broader adoption of Crypto Asset investments. However, with rulemaking under consideration and enforcement risk tied to fact-specific circumstances, market participants should continue to approach crypto custody with careful diligence and close attention to regulatory developments.

Footnotes

1 As used in the No-Action Letter, the term "Crypto Assets" refers to "assets that are digital representations of value that are recorded on a cryptographically secured distributed ledger." In a statement supporting the No-Action Letter, Commissioner Hester Peirce stated that the No-Action Letter "covers, in addition to the crypto assets that are native to crypto networks and applications and may be subject to the custody provisions, equity or debt securities that have been formatted as crypto assets on a crypto network (commonly known as 'tokenized' securities)."

2 Banking Regulators Address Crypto Custody; Implications for Asset Managers, Dechert OnPoint (July 24, 2025).

3 Division of Investment Management Staff in Consultation With FinHub Staff, Staff Statement on WY Division of Banking's "NAL on Custody of Digital Assets and Qualified Custodian Status" (Nov. 9, 2020). Following the issuance of the No-Action Letter, this 2020 Staff statement has now been withdrawn.

4 SEC Staff No-Action Letter (pub. avail. Sept. 30, 2025).

5 Banking Regulators Address Crypto Custody; Implications for Asset Managers, Dechert OnPoint (July 24, 2025).

6 See generally Spring 2025 Unified Agenda of Regulatory and Deregulatory Actions.

7 The No-Action Letter drew a sharp response from Commissioner Caroline Crenshaw, who noted in a statement that the "no-action position lacks factual support in key areas and provides scant legal justification for poking holes in core statutory protections."

8 SEC Division of Trading & Markets, Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology (May 15, 2025). See also A New Charter for Broker-Dealer Crypto Custody, Dechert OnPoint (May 27, 2025).

9 Interpretive Letter #1184, Clarification of Bank Authority Regarding Crypto-Asset Custody Services (May 7, 2025). OCC Interpretive Letters 1170 and 1183 also address this authority of national banks and federal savings associations to buy and sell assets held in custody at the customer's direction and to outsource to third parties bank-permissible crypto-asset activities, including custody and execution services, subject to appropriate third-party risk management practices. See also Banking Regulators Address Crypto Custody; Implications for Asset Managers, Dechert OnPoint (July 24, 2025).

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