The SEC's Crypto Custody Proposal: What It Changes for Fund Managers, and What It Does Not

On 1 October 2026 the SEC proposed rules on how registered investment advisers and regulated funds may custody crypto assets. It is a proposal, not a rule. But it is the clearest signal yet that custody, the control most allocators examine first, is moving from case-by-case staff relief towards a defined rulebook.

Executive Summary

The week of 29 September to 5 October 2026 produced several developments of institutional relevance. One stands above the others: the SEC's proposal to modernise the custody framework under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 for crypto assets.

According to the SEC's press release, the proposal would permit self-custody of crypto assets under specified conditions, allow state trust companies to act as custodians for client and fund crypto assets, update audit requirements for registered investment advisers, and revise standards for broker-dealer custodial services for regulated funds. Public comment runs for 60 days after Federal Register publication.

Our assessment, which is opinion rather than fact, is threefold:

• The direction is clear; the detail is not yet tested. Until the full text has been read against each fund's actual custody arrangements, no manager should treat the proposal as a change in its obligations.
• The proposal does not weaken the allocator question. Even if the rules widen who may hold crypto assets, due diligence will still ask who controls the keys, who verifies the assets exist, and who is accountable when something fails.
• For Cayman funds, the relevance is indirect but real. The proposal is aimed at US-registered advisers and US regulated funds. Cayman vehicles with SEC-registered managers, or US-regulated feeders, should take advice on whether and how it touches them.

Background

Custody has been the structural bottleneck for institutional crypto participation. Existing US custody rules were written around traditional securities and cash held at qualified custodians. SEC Chairman Paul Atkins has said as much in this context, stating that the rules were "written around traditional assets" (as reported by crypto.news; the SEC press release itself quotes him describing the proposal as giving advisers and funds "a compliant pathway where none existed before").

Two earlier developments frame the proposal. First, staff-level relief has been used to move specific tokenised structures forward. On 12 August 2026, the SEC's Division of Investment Management granted no-action relief to Franklin Templeton in respect of funds investing in blockchain-recorded money market fund shares through an affiliated transfer agent. As summarised by Greenberg Traurig, the relief rested on twelve representations, including controls over the authoritative ownership record, segregated records for each fund, daily reconciliation, and independent examinations three times a year, two of them unannounced.

Second, Congress has not delivered a market-structure statute. Reporting in August described the CLARITY Act as stalled in the Senate after the Majority Leader did not file for cloture, and secondary reports this week describe the SEC proposal as following the Act's failure to advance. We have not independently confirmed the Act's current procedural status, and readers should check it before relying on it. What is clear is that the SEC is acting under existing statutory authority rather than waiting for legislation.

What Happened This Week

The facts below are drawn from the SEC press release (2026-100) unless attributed otherwise.

• 1 October 2026: The SEC proposed rules and amendments establishing a framework for custody of crypto assets by registered investment advisers and regulated funds, meaning investment companies and business development companies.
• The proposal's headline elements: modernised custody rules under both 1940 Acts; self-custody permitted under specified conditions; state trust companies able to act as custodians; updated audit requirements for registered investment advisers; and revised broker-dealer custodial service standards for regulated funds.
• Comment period: 60 days following Federal Register publication.
• Reported detail (secondary sources): Advisers could self-custody only where no permitted custodian is available for the asset, with quarterly reassessment; state trust companies would be eligible after the adviser verifies state authorisation and written safeguards, with annual checks. The file number is reported as S7-2026-35. These points should be confirmed against the proposing release.
• 2 October 2026: SEC Commissioner Hester Peirce's resignation took effect, according to Cointelegraph, which reports she submitted it on 26 September. The same report says the Commission would be left with two sitting commissioners, Chairman Atkins and Commissioner Uyeda.

"Today's proposal would provide a clear regulatory framework for the custody of crypto assets, giving investment advisers and funds a compliant pathway where none existed before."SEC Chairman Paul S. Atkins, SEC press release 2026-100, 1 October 2026

Why Institutions Care

Allocators typically begin operational due diligence with custody. A rulebook that clarifies which entities may hold crypto assets for advisers and regulated funds changes the baseline questions in three ways.

It narrows ambiguity about who qualifies. Where a manager previously relied on interpretation to explain its custody model, a defined category of eligible custodian, including state trust companies, gives allocators something to measure it against.

It addresses a practical gap. The proposal is described as responding to the position where newly launched assets have no supported custodian for months. A conditional self-custody route with periodic reassessment is a recognition that custodian coverage lags the market.

It shifts the diligence burden rather than removing it. A conditional route to self-custody is only as strong as the manager's demonstrated competence and controls. We would expect sophisticated allocators to scrutinise any manager relying on it more closely, not less.

Operational Implications

If the proposal is adopted in anything like its current form, operational teams should expect to evidence, not merely assert, the following:

• Custodian eligibility mapping. For each asset held, a record of which custodian holds it, on what legal basis it qualifies, and what happens if its status changes.
• Key management and access controls. Where any self-custody is contemplated, documented signing authority, segregation of duties, multi-party approval, recovery procedures and incident response.
• Reconciliation. Independent, frequent reconciliation between on-chain positions, custodian records, the administrator's books and the manager's records.
• Reassessment cadence. A calendar and owner for periodic custodian availability reviews, if the reported quarterly reassessment survives into the final rule.
• Audit scope. Early dialogue with the auditor about how crypto custody arrangements are tested, given the proposal's reported audit changes.

For an overview of how custody models are evolving for hedge funds, see our earlier analysis, How Bank Custody Is Reshaping the Crypto Landscape for Hedge Funds.

Governance Implications

The governance question is not whether a custody model is permitted but whether the board can explain why it is appropriate. We suggest boards consider the following now, ahead of any final rule:

• Request a custody map from the manager: every asset, every custodian, every wallet or account structure, and the control owner for each.
• Confirm that the investment restrictions and offering document describe custody accurately and permit what the manager actually does.
• Require escalation where an asset has no qualified or otherwise eligible custodian, rather than leaving the choice to trading desk discretion.
• Minute the board's consideration of custody counterparty concentration, including the legal and operational consequences of a custodian failure.
• Ask who has authority to approve any exception to the custody policy, and how exceptions are reported to the board.

Regulatory Implications

It is important to separate what is required, what is proposed and what is merely prudent.

One structural point deserves attention. The Commission's composition is changing. If the reporting is accurate, the SEC will operate with two commissioners following Commissioner Peirce's departure. Whether a two-member Commission affects the pace or durability of final rulemaking is a legitimate question that we cannot answer from the evidence available. Managers should assume the comment process will continue and plan on a timeline that is uncertain.

The same week saw a separate development outside the United States. The Gherson analysis of the UK regime reports that the FCA's authorisation gateway for cryptoasset firms opens on 30 September 2026 and closes on 28 February 2027, with the regime commencing on 25 October 2027. Managers with UK touchpoints should confirm those dates with the FCA's own materials.

Cayman Implications

The SEC proposal does not amend Cayman law or CIMA's rules, and we are not aware of any basis on which it would apply directly to a Cayman fund with a non-US manager. Its relevance to Cayman structures arises through connections:

• SEC-registered managers of Cayman funds. If the manager is a registered adviser, the Advisers Act custody framework is part of its compliance perimeter, whatever the fund's domicile.
• US-regulated feeders and investors. US regulated funds that invest in Cayman vehicles may need to understand how the proposal affects their own custody and diligence.
• Allocator benchmarking. US allocators will increasingly use the SEC framework as a reference point when assessing any manager's custody arrangements, including those of a Cayman fund.

Separately, and as context rather than news of the week, Mondaq reports that CIMA's new AML and sanctions rules took effect on 18 September 2026 for Cayman regulated entities. These include a documented AML governance framework, minuted governing body oversight, independent AML testing and annual training. Governing bodies should treat custody controls and AML governance as connected, not separate, workstreams. We recommend confirming the rules' scope and deadlines against CIMA's published materials and with Cayman counsel.

Digital Asset Implications

Three themes are worth tracking for digital asset managers.

Custody is becoming an architectural choice. The combination of a possible state trust company route, bank custody developments and transfer-agent-based tokenised fund recordkeeping means managers have more than one defensible model. Each carries different legal, operational and counterparty profiles.

Tokenisation and collateral are progressing in parallel. The Block reports that on 24 September three CFTC divisions authorised futures commission merchants and derivatives clearing organisations to invest segregated customer funds in tokenised versions of permitted instruments, subject to conditions on legal and economic equivalence, liquidity, concentration, maturity and custody. That falls just outside the review window, but it reinforces the point that regulators are working through custody and collateral questions asset-class by asset-class.

Not every asset will qualify equally. Newly launched or illiquid tokens are exactly where custodian coverage is thinnest. Managers should expect scrutiny of any strategy that depends on such assets.

Risks

• Proposal risk. The framework may change materially, be delayed, or be challenged. Building controls solely around the proposal text would be premature.
• Over-reading the headline. "Self-custody permitted" is a conditional pathway as reported, not a general permission. Misdescribing it to investors would create disclosure risk.
• Concentration risk. A new category of custodian can concentrate assets in a small number of institutions before the market has tested them.
• Regulatory-capacity risk. A reduced Commission and a stalled statute leave a longer period in which staff relief and proposals, rather than settled law, define expectations.
• Operational risk. Any self-custody arrangement transfers key-management risk onto the manager's own control environment.

Opportunities

• Differentiation through evidence. Managers that can demonstrate a documented, tested custody framework will stand out in due diligence while others rely on narrative.
• Earlier allocator conversations. A defined US framework gives managers a clearer basis for engaging conservative allocators that have been waiting for regulatory clarity.
• Better service-provider terms. Greater custodian choice should improve negotiating leverage on segregation, reporting, and liability terms.
• Constructive input. The comment period allows the industry to raise operational practicalities directly with the Commission.

Looking Ahead

The following are the matters we will be watching. They are monitoring points, not predictions.

• Federal Register publication, which starts the 60-day comment clock.
• The text of the full proposing release, and in particular the conditions for self-custody and the audit changes.
• Any nomination to fill vacant Commission seats, and any statement on the Crypto Task Force's leadership.
• The status of congressional market-structure legislation.
• UK FCA gateway uptake and guidance during the application window.
• Further CFTC and SEC staff statements on tokenised collateral and fund structures.

Key Takeaways

• The SEC's 1 October 2026 proposal would create a framework for crypto custody by registered advisers and regulated funds. It is not yet in force.
• Self-custody is, as reported, conditional and exceptional; state trust companies would be a new eligible custodian category.
• Allocator due diligence on custody will not become lighter; it will become more specific.
• Cayman funds are affected mainly through SEC-registered managers, US feeders and allocator benchmarking.
• Boards should request a full custody map and confirm that offering documents match actual practice.

Conclusion

The significance of this proposal lies less in any single permission than in the direction of travel. Custody is moving from interpretation towards rules, and from relief for individual firms towards frameworks that apply to a class. That is helpful for the institutional market, provided managers resist two temptations: treating a proposal as settled law, and treating regulatory permission as a substitute for operational competence.

The CV5 Capital Perspective

David Lloyd, CEO, CV5 Capital. This section is commentary and opinion, not legal advice.

What fund managers should do this week

Build the custody map. List every asset, custodian, wallet structure and approver, then compare it with what your offering document says. If you cannot produce this in a day, that is the finding. Ask your counsel whether your adviser registration status brings the proposal into your perimeter.

What institutional investors should monitor

The final text of the self-custody conditions, any custodian concentration that emerges, and whether managers describe the proposal accurately in marketing material.

Governance actions boards should consider

Place custody on the next board agenda. Require a written exception process, a named owner for custodian availability reviews, and minuted consideration of counterparty concentration.

Operational enhancements worth evaluating

Independent reconciliation across on-chain data, custodian statements and administrator records; key-management drills; and an early conversation with your auditor on how custody will be tested.

Compliance considerations

Check that investor communications do not overstate what the proposal permits. Align custody controls with the AML governance framework Cayman regulated entities are now implementing.

Regulatory developments to watch

Federal Register publication and the comment deadline; Commission composition; the UK FCA authorisation window; and further CFTC and SEC staff positions on tokenised assets.

Expected developments over the coming weeks

We expect law firms and industry bodies to publish detailed analysis of the proposing release, and comment letters to begin forming. Our expectation, which is a judgement and not a forecast we can evidence, is that custodians and trust companies will begin marketing to the new eligibility category before any rule is final. Managers should treat such marketing with the same diligence they apply to any other provider.

Sources

• SEC press release 2026-100, 1 October 2026 (primary)
• The Block, SEC proposes framework allowing investment advisers, funds to self-custody crypto
• Cointelegraph, SEC Commissioner Hester Peirce to leave post on Oct 2
• The Block, Tokenization Briefing, 1 October 2026
• Greenberg Traurig, SEC staff grants no-action relief for digital asset custody
• Gherson, UK crypto regulation July 2026 update
• Mondaq, CIMA AML and sanctions rules: key actions for Cayman Islands funds