The United States Securities and Exchange Commission (SEC) has made significant strides in facilitating the digital asset industry’s growth. Recently, the SEC authorized state trust companies to act as custodians for cryptocurrencies under the Investment Company Act and the Investment Advisers Act.

State entities that previously couldn’t accept deposits are now empowered to oversee the safety of investors’ crypto holdings. A recent no-action letter from the SEC clarifies that these trust companies may potentially qualify as “banks” under the aforementioned Acts for managing crypto assets and associated cash.

Greenlight For Crypto Companies

The SEC has also indicated that it will not pursue enforcement actions against registered investment advisers or regulated funds treating state trust companies as qualified custodians for digital assets, provided they comply with specific criteria including

• annual due diligence,
• custody agreements,
• risk disclosures,
• best interest determinations.

Brian Daly, Director of the SEC’s Division of Investment Management, commented, “This added clarity was necessary as state-chartered trust companies weren’t universally recognized as eligible custodians for digital assets.”

“This is a staff letter, so at some point, this topic could be addressed by future rulemaking. We believe the market will benefit from having this guidance for today’s products, today’s managers, and today’s issues.”

He continued, explaining that this development opens doors for additional players in the crypto custody sector, enabling broader access for funds. Companies like Coinbase, Ripple, Standard Custody, and others will now be acknowledged as qualified custodians for cryptocurrencies.

Under the new SEC no-action letter, investment advisers can utilize trust companies like Gemini for crypto asset custody.

The Pushback Begins

However, not everyone is on board with this decision. SEC Commissioner Caroline Crenshaw expressed strong criticism of the staff letter regarding state trust companies, arguing that it jeopardizes investor protections by allowing firms that don’t meet traditional custody standards to manage crypto assets.

“The statutes and rules regarding custody are what stand between American investors and the risk of theft, loss, or misappropriation of their assets.”

She raised concerns that this relief diminishes standards, fosters unfair competition, and constitutes a troubling precedent, potentially putting investors’ assets at risk.