On October 1, 2026, the U.S. Securities and Exchange Commission proposed the most consequential rewrite of its investment adviser custody rules since 2009. Release Nos. IA-7023 and IC-36353, published in the Federal Register on October 6, would redesignate the existing Custody Rule (Rule 206(4)-2...
On October 1, 2026, the U.S. Securities and Exchange Commission proposed the most consequential rewrite of its investment adviser custody rules since 2009. Release Nos. IA-7023 and IC-36353, published in the Federal Register on October 6, would redesignate the existing Custody Rule (Rule 206(4)-2) as new Rule 223-1, create a parallel fund-custody pathway via proposed Rule 17f-8 under the Investment Company Act, and — for the first time — offer registered investment advisers and regulated funds two explicit mechanisms to custody crypto assets: self-custody under strict safeguarding conditions, and engagement of state-chartered trust companies as qualified custodians.
The proposal arrives eighteen months after the SEC rescinded Staff Accounting Bulletin 121 in January 2025, which had effectively barred banks from holding crypto on behalf of clients by requiring them to record custodied assets as on-balance-sheet liabilities. SAB 121's removal cleared the regulatory logjam on the banking side. Rule 223-1 now attempts to do the same for the adviser and fund side of the market, where an estimated 15,000+ SEC-registered investment advisers collectively manage over $128 trillion in assets. The comment period closes December 7, 2026.
The proposal was approved on a 3-0 vote by Chairman Paul Atkins and Commissioners Hester Peirce and Mark Uyeda. Peirce's resignation took effect October 2 — one day later — leaving the Commission with two members. If the rule proceeds to finalization, it will do so with a smaller bench.
The current Custody Rule, adopted in 2003 and last amended in 2009, requires SEC-registered investment advisers to maintain client assets with a "qualified custodian" — defined as a bank, broker-dealer, futures commission merchant, or certain foreign financial institutions. Crypto assets did not exist in any meaningful form when the rule was written. The result was a framework that did not explicitly address private key management, blockchain-native settlement, or the distinctive operational risks of digital assets.
The SEC's 2023 proposed rulemaking attempted to address this gap but, according to Commissioner Uyeda's October 1 statement, created a "no-win" scenario for advisers. That proposal expanded the definition of custodied assets to include crypto but provided no workable pathway for advisers to actually hold them, since most qualified custodians at the time refused to take on crypto liabilities under SAB 121's accounting regime.
The October 2026 proposal scraps the 2023 approach. Rule 223-1 would be reframed not merely as a custody rule but as an affirmative "safeguarding rule," reflecting authority Congress granted the SEC under Section 223 of the Advisers Act via the Dodd-Frank Act. The redesignation is not cosmetic: it signals the Commission's intent to regulate custody of all asset classes — traditional and digital — under a unified framework with tailored provisions for assets that behave differently on a technical level.
Chairman Atkins stated the proposal aims "to close a gap that has left investment advisers and funds guessing how to effect lawful custody of an asset class that their clients increasingly demand." Commissioner Uyeda noted that "asset segregation for paper certificates sitting in bank vaults versus assets recorded on a distributed ledger cannot look the same, even if the underlying principle is identical."
The proposal would add state-chartered trust companies to the list of qualified custodians under Rule 223-1, but only for crypto assets and related cash or cash equivalents. The SEC estimates that roughly 19 state trust companies currently specialize in crypto custody. Prominent examples include Anchorage Digital, BitGo Trust, and Coinbase Custody — entities that already hold the vast majority of institutional crypto in the United States.
Before engaging a state trust company, and annually thereafter, an adviser must:
This codifies what has, until now, rested on a fact-specific legal analysis and a 2025 staff no-action letter. According to law firm King & Spalding, the codification "removes the ambiguity that has made compliance counsel uncomfortable and boards reluctant."
The more contentious provision allows an adviser to hold client crypto assets directly — but only under tightly prescribed conditions:
The self-custody pathway is designed as a narrow exception, not a broad license. The SEC's own release language describes it as available "only where" — not "whenever" — a qualified custodian cannot be found. As the universe of state trust companies expands and more banks enter crypto custody post-SAB 121, the practical scope of this pathway may shrink over time.
Alongside Rule 223-1, the SEC proposed new Rule 17f-8 under the Investment Company Act of 1940. This rule would permit registered investment companies and business development companies to maintain crypto assets with qualifying state trust companies, subject to the same due diligence, review, and segregation conditions applicable to advisers.
The rule applies to registered investment management companies and BDCs. Unit investment trusts and face-amount certificate companies are not eligible.
For regulated funds, Rule 17f-8 also requires board oversight of custodial arrangements. A fund's board or designated compliance officer must review the state trust company custodian at least annually, covering the adequacy of safeguarding policies, any material incidents, and the continuing authorization of the custodian by its state banking authority.
The practical significance: mutual funds, ETFs, and BDCs that wish to hold crypto assets directly — not through derivatives or structured products — now have a proposed regulatory pathway to do so via state trust companies, provided they meet the specified conditions.
The proposal enters a custody market undergoing rapid institutional expansion.
Market size: The global institutional crypto custody market was valued at $1.41 billion in 2025, projected to reach $1.83 billion in 2026, and is forecast to hit $14.4 billion by 2034 at a 29.4% CAGR, according to Intel Market Research.
Concentration risk: Coinbase Custody holds approximately 84% of all U.S. spot Bitcoin ETF assets — roughly $77 billion out of $91.7 billion in total ETF holdings as of early 2026. This level of concentration has drawn attention from regulators and investors alike.
Tokenized fund growth: Tokenized fund AUM crossed $20 billion in early 2026, with most assets sitting at one of five institutional custodians: Anchorage Digital, BitGo Trust, Fireblocks, Coinbase Custody, and Komainu.
Banking re-entry: BitGo and Coinbase both received OCC conditional approvals in late 2025 and early 2026, positioning them to compete as regulated banks rather than merely technology vendors. The line between crypto-native custodians and traditional banking institutions is blurring.
Insurance: BitGo carries a $250 million Lloyd's of London policy; Coinbase Custody holds a $320 million crime policy through Aon. These figures remain well below the total value of assets under custody, a structural risk the industry has not fully resolved.
The proposal has drawn broad support from the crypto industry. Bitwise, Nasdaq, Blockchain Association, DeFi Education Fund, Uniswap Labs, Ripple, Solana Policy Institute, and Stellar have all endorsed the framework's direction. According to an early tally of comment letters, approximately 5% represent unconditional endorsements, while 70% support the direction with recommended modifications.
According to a survey cited in SEC filings, 87% of institutional investors plan to gain crypto exposure via direct holdings or spot exchange-traded products, and 60% of asset managers prefer registered investment vehicles. The custody bottleneck has been one of the primary barriers preventing this demand from translating into allocations.
State securities regulators through the North American Securities Administrators Association (NASAA) have been the most vocal critics. NASAA President Elizabeth Bowling argued the SEC proposal puts "the Commission's thumb on the scale to overcome weaknesses common to crypto offerings in order to facilitate sales to retail investors."
Better Markets director Benjamin Schiffrin stated the proposal would "expose investors to the very high risk of loss the SEC exists to prevent," and objected specifically to the use of state trust companies as qualified custodians, arguing they "can operate under different standards and levels of oversight than traditional custodians."
The Bank Policy Institute urged the SEC to apply "proven safeguards" from the banking sector rather than creating a parallel custody regime for state trust companies that do not face identical capital and liquidity requirements.
Commissioner Peirce's resignation on October 2 leaves the SEC with Chairman Atkins and Commissioner Uyeda — a two-member Commission operating under a rule permitting a one-member quorum. The political calendar matters: the 2028 presidential election cycle is approaching, and as JPMorgan has warned, crypto regulatory gains made during the current administration "could be reversed" after a change in leadership. The comment period closing December 7 gives the Commission a narrow window to finalize the rule before political dynamics shift.
Self-custody scope creep: The quarterly written determination that no qualified custodian is available creates a paperwork burden, but it also creates a gray area. As the custodial landscape expands, the definition of "available" will become contested. Advisers with niche altcoin strategies may argue no custodian will accept their tokens; regulators may counter that cost and inconvenience do not constitute unavailability.
State trust company oversight variance: State banking authorities operate under different standards in different jurisdictions. Wyoming's Special Purpose Depository Institution framework differs materially from New York's trust company charter. The proposal does not harmonize these differences — it simply requires advisers to verify that the state authority has authorized custody. The quality of that authorization varies.
Insurance gap: Total digital assets under institutional custody now exceed $100 billion. The largest insurance policies in the market top out at $320 million. A catastrophic custody failure — whether through exploit, insider theft, or operational error — would expose this structural shortfall.
Finalization uncertainty: The proposal is not a final rule. The SEC must review comments, potentially revise the proposal, and vote on a final version. With two Commissioners, any disagreement would block adoption.
Rule 223-1 is the SEC's attempt to resolve a multi-year regulatory impasse that left advisers unable to comply with custody rules when holding crypto assets. The proposal acknowledges a simple reality: investment advisers' clients want exposure to digital assets, and the existing rules did not provide a lawful path to deliver it.
The economic significance is substantial. The proposal could unlock custody pathways for a portion of the $128 trillion in assets managed by SEC-registered advisers. Even a fractional allocation to crypto — the 87% institutional interest figure suggests meaningful latent demand — would represent significant capital inflows to the digital asset market.
Whether the rule survives the comment process, political transitions, and the structural challenge of a two-member Commission remains uncertain. The comment period closes December 7. The data will speak for itself.