The U.S. Securities and Exchange Commission (SEC) has proposed a new regulatory framework for crypto assets.

The aforementioned framework will make it easier for registered investment advisors and regulated funds to allocate this emerging asset class on behalf of clients, and in some cases, they may also hold the relevant assets in a self-managed manner.

This proposal will amend the custody requirements under the Investment Advisors Act of 1940 and the Investment Companies Act of 1940.

SEC will allow investment advisors to self-host certain crypto assets when they are unable to find a suitable external custodian. Trust companies licensed by the state will also have the option to become custodians for crypto assets.

SEC Chairman Paul Atkins stated that the existing custody rules are established around a financial system that is vastly different from today's.

At the time this regulatory framework was established, Bitcoin did not yet exist. Since then, crypto assets have developed into a class of assets that are worth trillions of dollars and highly sought after by investors.

Atkins stated that the proposal aims to replace the regulatory uncertainties surrounding the custody of crypto assets with a clear compliance framework, which will apply to investment advisors and funds. In his words, the existing rules are "formulated for an era that has already passed."

It should be noted that these are currently only proposed rules. Their final form may change after seeking public opinion.

This proposal does not imply granting investment advisors the unrestricted authority to hold private keys on their own.

Investment advisors must first determine whether there is no custodian that meets the requirements for a particular crypto asset. Advisors must make this determination before taking over custody responsibilities and must re-evaluate it at least once every quarter.

Self-hosting will exist as a conditional alternative. Investment advisors will also need to demonstrate that they possess the professional capabilities required to protect the relevant specific crypto assets.

Specific technical requirements

Host institutions must handle private key management and the issue of joint authorization by at least two people. Investment advisors must also store each client's encrypted assets in one or more blockchain addresses that contain only that client's assets.

They also must consider the associated risks involved in directly managing customers' encrypted assets.

Investment advisors need to prepare a report that reviews the control measures related to custody services, including the necessary safeguard mechanisms.

Customers receive their account statements at least once every quarter. The statement will indicate the blockchain address where the customer's encrypted assets are held, as well as the network on which that address operates.

Currently, this proposal is still in the proposal stage only. The public will have 60 days to submit their opinions in the Federal Register.