The United States Securities and Exchange Commission has unveiled a tailored regulatory framework governing how registered investment advisers and regulated funds store digital assets, introducing an avenue for conditional direct custody when qualified institutional custodians are unavailable.
Under the proposed Rule 223-1(b)(7), fund managers would be permitted to practice direct self-custody of specific crypto tokens under strict reporting requirements, operational controls, and audit safeguards. However, advisers must transfer those holdings to an institutional custodian as soon as an eligible service provider supports the specific asset. The package, reported by Stocktwits, also formally recognizes state-chartered trust companies as eligible custodians, modernizes broker-dealer holding standards, allows on-chain recordkeeping, and clarifies standing letters of authorization for trading operations.
Modernizing Outdated Safekeeping Standards
SEC Chairman Paul S. Atkins described the regulatory package as an essential transition toward institutional clarity, arguing that it replaces the regulatory ambiguity created by legacy safekeeping rules designed for conventional paper certificates and central depositories. Atkins stressed that the initiative provides investment advisers and mutual funds with a realistic, compliant pathway to hold emerging digital tokens rather than keeping capital parked in regulatory limbo.
The policy overhaul follows the legislative stall of the Digital Asset Market Clarity Act in the United States Senate last month, effectively shifting the responsibility back to administrative regulators to establish market rules through formal agency procedures. Financial institutions have faced chronic operational bottlenecks since 2017, frequently finding themselves barred from taking exposure to newly launched digital networks simply because chartered institutional banks and institutional trust custodians lacked the technical infrastructure to safeguard those tokens.
Industry Reaction and the DeFi Blind Spot
Johanna Collins-Wood, General Counsel at asset manager Bitwise, characterized the initiative as a thoughtful resolution to long-standing administrative hurdles, particularly praising the formal recognition of state trusts and the legitimacy granted to on-chain accounting records. However, Collins-Wood highlighted that the commission’s framework rests on a traditional architectural premise of discrete wallets and segregated client addresses—mechanisms that do not neatly capture how decentralized finance protocols operate.
According to Bitwise’s review of the filing, the SEC included specific inquiries, spanning questions 171 through 180, seeking public input on staking mechanisms, liquid receipt tokens, and smart-contract vaults. The omission leaves advanced institutional products in an ambiguous posture while Wall Street firms accelerate technical trials; Morgan Stanley recently launched a dedicated Digital Asset Lab specifically to test decentralized finance vaults, despite cautioning that the architecture remains too immature for direct firm-wide platform deployment.
Public comments on the SEC proposal will remain open for 60 days following its formal entry into the Federal Register. Institutional capital flows into spot crypto products have remained resilient throughout the policy announcement, with spot Bitcoin exchange-traded funds recording more than $222 million in net institutional inflows across the two trading sessions surrounding the publication.