On September 30, 2025 the Division of Investment Management of the Securities and Exchange Commission (the “Commission”) issued a no-action letter stating it would not recommend enforcement action to the Commission against Registered Advisers or Regulated Funds (as such terms are defined, below) for maintaining crypto assets and related cash and cash equivalents with certain state-chartered financial institutions (“State Trust Companies”).[1] The letter clarifies that Registered Advisers and Regulated Funds may select State Trust Companies as crypto asset custodians, subject to the performance of certain due diligence and disclosure procedures.
The letter specifies that Registered Advisers and Regulated Funds should conduct due diligence to confirm whether a State Trust Company is authorized by its relevant state banking authority to provide crypto asset custody and maintains internal policies and procedures to safeguard Crypto Assets (with particular attention paid to key management and cybersecurity).[2] Registered Advisers or Regulated Funds can satisfy due diligence procedures by annually receiving and reviewing audited financial statements and reports on internal controls from an independent public accountant. The Registered Adviser or Regulated Fund must also disclose the use of the State Trust Company to its clients and enter a custodial services agreement stipulating that the State Trust Company will not lend, pledge, hypothecate, or rehypothecate any crypto assets without prior consent, and all such crypto assets will be segregated from the State Trust Company’s assets.
In a statement made in tandem with the issuance of the letter, Commissioner Hester Peirce noted the relief “does not expand the definition of permissible [custodians]” but rather provides greater clarity to those already meeting the established criteria.[3]Commissioner Peirce also underlined the scope of the relief, noting it only applies to “client crypto assets held by registered advisers or crypto asset investments of regulated funds. The relief, therefore, applies primarily to institutional managers of crypto asset investments, providing them with greater certainty that a wider range of custody solutions (via the inclusion of State Trust Companies) are available for use.
The request for the relief came on behalf of investment advisers registered under the Investment Advisers Act of 1940 (the “Advisers Act” and such advisers, “Registered Advisers”) and funds registered as investment companies or business development companies under the Investment Company Act of 1940 (the “1940 Act” and such funds “Regulated Funds”). The Advisers Act and the 1940 Act, respectively, specify that Registered Advisers and Regulated Funds must maintain client securities and similar investments with certain specified custodians.[4] Although both statutes designate “banks” as a specified custodian, the request letter questioned whether State Trust Companies fall within that definition.
The request letter suggested federal and state financial service regulations have not kept pace with evolving crypto asset practices and, as a result, have limited the availability of crypto asset custodians. As an example, the request letter pointed to the SEC’s “Special Purpose Broker-Dealer” framework that allowed participating broker-dealers to custody crypto asset securities but prevented them from engaging in non-security crypto assets or traditional securities.[5] This heavy-handed restriction likely dissuaded many would-be crypto asset custodians since it severely limited their exposure to all other assets. Regulatory uncertainty has also hindered State Trust Companies from performing the role, despite being poised to become important players through adherence to existing custody regulations. The Commission’s Division of Investment Management ultimately agreed with this assessment. Subject to appropriate disclosures and due diligence, the Commission has effectively greenlit the use of State Trust Companies as crypto asset custodians by Registered Advisers and Regulated Funds.
The Commission’s decision did not receive unanimous support. Democratic Commissioner Caroline Crenshaw voiced her dissent towards the decision, suggesting the relief “pokes holes in our custody regime” by making special exceptions for crypto assets and undermining existing federal guidelines.[6] Commissioner Crenshaw argued changes of this magnitude should be conducted via rulemaking rather than no-action relief. Despite these comments, the Commission’s decision in this no-action letter continues to shrink regulatory gray zones, making it easier for institutional wealth to be directed towards crypto assets. Commissioner Peirce closed out her statement by suggesting the Commission should continue to analyze whether any aspects of its asset custody requirements need further improvement or modernization.[7]
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[1] Div. of Inv. Mgmt., U.S. Sec. & Exch. Comm’n, Response of the Office of Chief Counsel, Division of Investment Management — Simpson Thacher & Bartlett LLP (No-Action Letter) (Sept. 30, 2025), https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-investment-management-staff-no-action-interpretive-letters/simpsonthacherbartlett093025 (last visited Oct. 14, 2025).
[2] As used in the no-action letter, “Crypto Assets” refers to assets that are digital representations of value that are recorded on a cryptographically secured distributed ledger.
[3] Commissioner Hester M. Peirce, Out of the Gray Zone: Statement on The Division of Investment Management’s No-Action Letter Relating to the Custody of Crypto Assets with State Trust Companies (Sept. 30, 2025), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-custody-crypto-assets-093025.
[4] 15 U.S.C. § 80b-6(4) (2018); 15 U.S.C. § 80a-17(f) (2018).
[5] Custody of Digital Asset Securities by Special Purpose Broker-Dealers, Exchange Act. Rel. No. 90788 (Dec. 23, 2020).
[6] Commissioner Caroline A. Crenshaw, Poking Holes: Statement in Response to No-Action Relief for state Trust Companies Acting as Crypto Asset Custodians (Sept. 30, 2025), https://www.sec.gov/newsroom/speeches-statements/crenshaw-093025-poking-holes-statement-response-no-action-relief-state-trust-companies-acting-crypto (last visited Oct. 14, 2025).
[7] Peirce, supra note 1.