{"id":16938,"date":"2026-10-02T20:40:09","date_gmt":"2026-10-02T20:40:09","guid":{"rendered":"https:\/\/cryptonewsdesk.com\/?p=16938"},"modified":"2026-10-02T20:40:13","modified_gmt":"2026-10-02T20:40:13","slug":"sec-proposes-crypto-self-custody-rules-for-funds-but-who-checks-the-keys","status":"publish","type":"post","link":"https:\/\/cryptonewsdesk.com\/index.php\/2026\/10\/02\/sec-proposes-crypto-self-custody-rules-for-funds-but-who-checks-the-keys\/","title":{"rendered":"SEC Proposes Crypto Self-Custody Rules for Funds \u2014 But Who Checks the Keys?"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">The U.S. Securities and Exchange Commission is considering a major change to the way investment advisers and regulated funds hold cryptocurrencies.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Under a proposal announced on October 1, certain advisers and funds could be allowed to hold crypto assets directly instead of relying entirely on outside custodians.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But the proposal raises a difficult question.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If the same institution that owns the crypto also controls the private keys, who independently verifies that the assets are really there, properly segregated and protected from misuse?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That question sits at the center of the SEC&#8217;s proposed crypto custody framework.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">SEC proposes conditional crypto self-custody<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The SEC&#8217;s proposal covers registered investment advisers and regulated funds, including registered investment companies and business development companies.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Under the proposed framework, crypto assets could be held in self-custody in certain circumstances.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The proposal would also allow state trust companies to serve as custodians for client and fund crypto assets.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">However, the SEC has not simply approved unrestricted self-custody.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The proposal still contains conditions that would determine when advisers or funds can use direct custody.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is also not yet a final rule.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The public will have 60 days to submit comments after the proposal is published in the Federal Register.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That publication date, rather than the SEC&#8217;s October 1 announcement, starts the formal comment period.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">A crypto wallet balance does not prove ownership<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Crypto custody creates challenges that do not exist in exactly the same form with traditional assets.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Suppose a fund says it owns 10,000 tokens.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">An auditor could check a blockchain explorer and confirm that a wallet contains 10,000 tokens.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But that does not answer several important questions.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It does not prove that the fund is the only entity capable of controlling the wallet.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It does not prove that the tokens belong exclusively to that fund rather than being associated with multiple customers.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It also does not show whether the crypto has been pledged, borrowed against or otherwise encumbered through an offchain agreement.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A blockchain can show the balance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It cannot automatically show the legal ownership structure behind that balance.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Auditors need more than a wallet screenshot<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">One way to demonstrate control over a crypto wallet is through a signed message.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">An auditor could ask the custodian to sign a unique message using the private key connected with a particular blockchain address.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This can prove that the institution had signing ability at that moment.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But even that test has limitations.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It does not prove that no one else copied the private key.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It does not show whether key-storage procedures are secure.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And it does not establish which customer legally owns the assets.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A small test transaction can provide further evidence that the wallet can move assets.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But neither test replaces proper accounting reconciliation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">An independent examiner still needs to compare:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Wallet balances<\/li>\n\n\n\n<li>General ledger records<\/li>\n\n\n\n<li>Customer or fund subledgers<\/li>\n\n\n\n<li>Outstanding transactions<\/li>\n\n\n\n<li>Third-party confirmations<\/li>\n\n\n\n<li>Legal ownership records<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The strongest evidence comes when all of those records agree consistently over time.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Private keys create a different kind of custody risk<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A traditional vault has a physical door.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A crypto private key is simply information.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That makes digital asset custody fundamentally different.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A private key can potentially be copied without removing the original.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">An employee or attacker could duplicate signing information without leaving the type of physical evidence normally associated with traditional theft.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The first clear sign of compromise may be an unauthorized blockchain transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That is why institutions often use technologies such as hardware security modules and multiparty computation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">These systems can reduce the risk of a single person controlling a wallet.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But they do not eliminate the need for oversight.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Auditors must understand how signing systems actually work.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Multisignature alone does not guarantee security<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A wallet might use a three-of-five signing arrangement, meaning at least three of five authorized signers are required to approve a transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That sounds secure.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But the real level of security depends on how those signing credentials are managed.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If three signing shares are stored in the same cloud account, one security breach could potentially compromise enough credentials to authorize a transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The same risk exists if a single administrator can change wallet policies, reset credentials or alter the signing threshold.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A proper review should therefore examine:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Who can approve transactions<\/li>\n\n\n\n<li>Who can modify approval policies<\/li>\n\n\n\n<li>Who can recover signing credentials<\/li>\n\n\n\n<li>Where key shares are stored<\/li>\n\n\n\n<li>How policy changes are logged<\/li>\n\n\n\n<li>Who receives alerts when sensitive settings change<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The number of signers matters, but governance around those signers matters just as much.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Crypto transactions can be difficult to reverse<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Another challenge with self-custody is transaction finality.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Traditional financial intermediaries can sometimes reverse an incorrect internal transaction before settlement is completed.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Crypto transfers are different.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Once a valid blockchain transaction reaches finality, an adviser may have no technical way to reverse it.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Recovery may depend on the person receiving the assets voluntarily returning them.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In some cases, a token issuer may have a freeze function.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In other cases, legal action may be necessary.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Those remedies are very different from preventing a transaction from happening in the first place.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That means funds using self-custody need strong approval and recovery procedures before assets are transferred.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Why funds might want direct crypto custody<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Despite the risks, self-custody can offer practical advantages.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Some blockchain assets require active interaction with their native networks.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A fund might need to:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Stake tokens<\/li>\n\n\n\n<li>Participate in governance<\/li>\n\n\n\n<li>Redeem blockchain-based assets<\/li>\n\n\n\n<li>Interact with smart contracts<\/li>\n\n\n\n<li>Move assets between protocols<\/li>\n\n\n\n<li>Manage time-sensitive network activity<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Routing every action through an outside custodian can introduce delays.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It can also create concentration risk if many investment firms depend on the same small group of service providers.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The SEC proposal appears intended, in part, to address this mismatch between traditional custody rules and blockchain-native assets.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But gaining more operational control also creates additional responsibility.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A fund that controls its own wallets must be able to demonstrate that those controls are secure and independently verifiable.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Self-custody may be a limited exception<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The proposed framework appears to place limits on when advisers can use self-custody.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">SEC Commissioner Hester Peirce said an adviser would first need to determine that no permitted custodian is available for a particular crypto asset.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That determination would then need to be repeated quarterly.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If adopted in that form, self-custody would not simply become a permanent alternative that any adviser could choose whenever it preferred.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Instead, it could function as an exception when suitable third-party custody is unavailable.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This means advisers may need to document exactly why an external custodian cannot provide the required service.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Advisers may need to prove custody is unavailable<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A quarterly review could require advisers to keep detailed records.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For example, a firm may need to document which custodians it contacted.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It may also need to record:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Which crypto asset required custody<\/li>\n\n\n\n<li>Which blockchain network was involved<\/li>\n\n\n\n<li>What services the adviser required<\/li>\n\n\n\n<li>Whether staking or redemption support was needed<\/li>\n\n\n\n<li>Why each potential custodian was unsuitable<\/li>\n\n\n\n<li>Whether a provider later added support<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">This could become especially important for newly launched cryptocurrencies.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Imagine an adviser self-custodies a token in January because no permitted custodian supports the network.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If a qualified provider begins supporting that token in March, the adviser may need to reassess whether continuing self-custody remains justified.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The exact requirements will depend on the final wording of any adopted rule.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Cost alone may not justify self-custody<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The concept of availability could also become important.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Suppose a custodian supports a token but charges high fees.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Would the service count as unavailable?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Or would the adviser simply prefer not to pay the cost?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Those are different situations.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Likewise, a custodian may technically support an asset but not provide an essential feature such as staking, smart-contract withdrawals or network-specific redemption.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The final rule may need to define what meaningful custody availability actually means.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Without a clear standard, different advisers could interpret the requirement differently.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">State trust companies could become another custody option<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The SEC proposal also addresses state trust companies.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">These institutions may provide specialized digital asset custody services while operating within a regulated corporate structure.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Using a trust company can separate the investment adviser from the institution actually holding or controlling the assets.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That can make external verification easier.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">However, simply being a trust company does not guarantee that every custody system is safe.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Advisers may still need to examine:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Who legally owns wallet accounts<\/li>\n\n\n\n<li>Whether customer assets are segregated<\/li>\n\n\n\n<li>Whether crypto is held in shared addresses<\/li>\n\n\n\n<li>How client ownership is recorded<\/li>\n\n\n\n<li>What happens if the custodian becomes insolvent<\/li>\n\n\n\n<li>Whether custody technology is outsourced<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The legal custodian and the technology provider may not always be the same organization.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Outsourced wallet technology adds another layer<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A trust company may use an outside provider for wallet infrastructure.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That provider could supply:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Key management<\/li>\n\n\n\n<li>Transaction signing<\/li>\n\n\n\n<li>Recovery services<\/li>\n\n\n\n<li>Transaction screening<\/li>\n\n\n\n<li>Wallet software<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The trust company may remain legally responsible for custody even though another company controls important parts of the technology.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Regulators and auditors therefore need to understand the entire control chain.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The location of the private key and the location of legal responsibility can be different.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Fund shareholders do not directly own wallet addresses<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">For investors in a registered fund, custody is even more indirect.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A shareholder owns shares in the fund.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The shareholder does not usually own a direct claim to a specific Bitcoin output or token wallet.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The fund owns or controls the portfolio assets under its governing documents.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Custodians, accountants, transfer agents and other service providers then maintain various records connected to those holdings.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A blockchain explorer can show what exists in an address.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It cannot by itself establish the shareholder&#8217;s legal entitlement to the fund&#8217;s assets.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Custody problems can affect a fund before assets are actually stolen<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A custody failure does not always begin with confirmed theft.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Imagine a fund cannot prove that it still controls a wallet.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Even before assets are known to be missing, the uncertainty could create problems.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The fund may have difficulty:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Calculating net asset value<\/li>\n\n\n\n<li>Processing redemptions<\/li>\n\n\n\n<li>Confirming portfolio holdings<\/li>\n\n\n\n<li>Preparing financial statements<\/li>\n\n\n\n<li>Meeting disclosure obligations<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">A highly liquid crypto market does not solve the problem if the fund cannot access its own tokens.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That is why the custody proposal also matters for audits and accounting.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Smart contracts can complicate custody further<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Holding a crypto token in a wallet is only one form of control.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Assets can also be deposited into smart contracts.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For example, a fund could deposit tokens into a DeFi protocol and receive a receipt token in return.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The original asset is no longer sitting directly in the fund&#8217;s wallet.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The accounting system then needs to explain what the fund actually owns.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">An auditor may need to determine:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Where the original token went<\/li>\n\n\n\n<li>What the receipt token represents<\/li>\n\n\n\n<li>Whether the original asset can be redeemed<\/li>\n\n\n\n<li>Whether withdrawals can be paused<\/li>\n\n\n\n<li>Who can modify the smart contract<\/li>\n\n\n\n<li>Whether both assets have accidentally been counted<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Blockchain transparency helps trace transactions.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It does not automatically determine their accounting or legal treatment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Staking creates another form of control risk<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Staking presents similar challenges.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A validator operator may run the technical infrastructure without possessing the credentials required to withdraw the assets.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A custodian may control withdrawal credentials while delegating validator operations to another provider.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If staked assets are locked, slashed or otherwise restricted, the fund may suffer an economic loss even though no private key has been stolen.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That means crypto custody oversight must consider more than simple possession of a key.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Funds need to document the different forms of authority connected with each asset.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Regulators could test custody by simulating failure<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">One useful way to evaluate custody systems is through practical testing.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Instead of simply reviewing written policies, examiners could simulate real-world problems.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For example, a fund could be asked to handle a withdrawal while one signer is unavailable.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another test could involve a potentially compromised signing device.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A third could simulate the destination wallet address changing immediately before approval.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">These exercises could reveal:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Who can stop a payment<\/li>\n\n\n\n<li>Who can replace a signer<\/li>\n\n\n\n<li>Whether suspicious changes trigger alerts<\/li>\n\n\n\n<li>How quickly backup procedures work<\/li>\n\n\n\n<li>Whether the fund can still meet redemption obligations<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Testing failure conditions can reveal weaknesses that may not appear in a policy document.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What happens after an unauthorized transfer?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Regulators may also want funds to demonstrate how they would respond after assets have already moved.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">An incident record should identify:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>When the unauthorized transfer was detected<\/li>\n\n\n\n<li>Which wallets were affected<\/li>\n\n\n\n<li>Which other wallets may be at risk<\/li>\n\n\n\n<li>Who must notify management<\/li>\n\n\n\n<li>When fund directors are informed<\/li>\n\n\n\n<li>Whether regulators must be contacted<\/li>\n\n\n\n<li>Whether the token issuer can freeze assets<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The recovery plan must also reflect what is technically possible.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A fund should not promise that stolen crypto can be frozen if the relevant blockchain or token has no such capability.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Recovery mechanisms can create their own risks<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A recovery feature can help an institution regain access if a signing device is lost.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But the person or organization capable of triggering recovery may also have significant power over the wallet.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That means recovery procedures need strong controls.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A proper system might include independent approvals, notification requirements and safeguards against unauthorized recovery attempts.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The recovery process itself should also be tested periodically.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Simply saying that a wallet uses multisignature or MPC technology is not enough.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Institutions need evidence that the recovery system actually works as intended.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Self-custody could reduce dependence on a small group of providers<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">There is also an argument in favor of greater custody flexibility.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Existing financial rules were largely created before blockchain assets became widely used.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If advisers can use only a small number of qualified custodians, large amounts of crypto could become concentrated among a few companies.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">An outage, security breach or withdrawal freeze at one provider could then affect many funds at the same time.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Conditional self-custody could spread some of that operational risk.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But that only works if advisers themselves can meet strong and independently testable security standards.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">External custodians are not risk-free either<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Using an outside custodian does not eliminate risk.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A specialist provider can still fail because of:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Cyberattacks<\/li>\n\n\n\n<li>Insolvency<\/li>\n\n\n\n<li>Poor accounting records<\/li>\n\n\n\n<li>Weak internal controls<\/li>\n\n\n\n<li>Technology-provider failures<\/li>\n\n\n\n<li>Incorrect transaction processing<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The relevant question is not simply whether self-custody or third-party custody is safer.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is whether the complete custody arrangement can be independently checked.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Different models may have different risks.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Insurance cannot replace custody controls<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Some custodians or investment firms may point to insurance as protection against crypto losses.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Insurance can be valuable, but it does not prove that custody controls are effective.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Policies can contain exclusions and coverage limits.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The fund also needs to know:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Who is insured<\/li>\n\n\n\n<li>Which wallets are covered<\/li>\n\n\n\n<li>Which incidents qualify<\/li>\n\n\n\n<li>What the total coverage limit is<\/li>\n\n\n\n<li>Whether multiple customers share the same limit<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Insurance may reduce losses after an incident.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It does not verify that customer assets are properly segregated or protected in everyday operations.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Proof of reserves is also limited<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Proof-of-reserves reports can provide useful information about crypto holdings.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But they are not necessarily equivalent to a full financial statement audit.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A reserve report may confirm that certain wallets held a particular amount of cryptocurrency at a specific time.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It may not verify:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Customer liabilities<\/li>\n\n\n\n<li>Offchain obligations<\/li>\n\n\n\n<li>Asset ownership throughout the period<\/li>\n\n\n\n<li>Whether assets were temporarily moved for the snapshot<\/li>\n\n\n\n<li>Customer-level allocation<\/li>\n\n\n\n<li>Encumbrances<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The scope of the report therefore matters just as much as the headline reserve number.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Investors need several layers of evidence<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Reliable crypto custody requires multiple layers of verification.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Onchain records can establish that assets exist at particular addresses.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Signed challenges or custodian confirmations can provide evidence of wallet control.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Accounting records determine how those assets are allocated to particular portfolios or customers.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Legal agreements establish who ultimately owns the assets and what rights they have if a service provider fails.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">No single layer is enough on its own.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A wallet screenshot cannot replace proper legal segregation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Likewise, a legal agreement cannot replace proof that the crypto actually exists.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The SEC proposal is not yet final<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The most important point for investors is that the SEC has proposed a framework.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It has not adopted a final rule.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The official comment period begins after publication in the Federal Register and will run for 60 days.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Public feedback could lead to changes in:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Self-custody eligibility<\/li>\n\n\n\n<li>Audit requirements<\/li>\n\n\n\n<li>Custodian definitions<\/li>\n\n\n\n<li>Transition periods<\/li>\n\n\n\n<li>Segregation standards<\/li>\n\n\n\n<li>Recovery requirements<\/li>\n\n\n\n<li>Compliance deadlines<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Even after a final rule is adopted, other legal issues may still matter.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">State property law, bankruptcy law, fund governance requirements and insurance contracts could all affect how crypto custody works in practice.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What should investors watch next?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The next major milestone will be publication of the proposal in the Federal Register.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That will establish the official comment deadline.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Investors and industry participants should also watch the final conditions attached to self-custody.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Important questions include whether advisers need independent examinations, how frequently custody arrangements must be tested and what segregation requirements will apply.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The treatment of state trust companies will also be significant.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Regulators may need to clarify how outsourced wallet technology and subcontracted services fit into the custody framework.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For fund investors, disclosures could become especially important.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Clear reporting should explain who controls wallet credentials, whether assets are pledged or locked, how withdrawals work and what happens after a custody incident.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Ultimately, the most important question is not simply who holds the private key.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is whether an independent party can consistently connect the blockchain balance to the fund&#8217;s accounting records, customer entitlements and legal ownership.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If the final framework makes that process transparent and testable, self-custody could give investment firms more flexibility without forcing investors to rely on trust alone.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If that reconciliation remains unclear, the custody problem will simply move from an external provider to the fund itself.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Disclaimer:<\/strong> This article is for informational and educational purposes only and does not constitute legal, financial or investment advice.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The U.S. Securities and Exchange Commission is considering a major change to the way investment advisers and regulated funds hold cryptocurrencies. Under a proposal announced on October 1, certain advisers and funds could be allowed to hold crypto assets directly instead of relying entirely on outside custodians. But the proposal raises a difficult question. If&#8230;<\/p>\n","protected":false},"author":3,"featured_media":16939,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[63,70],"tags":[2413,65,77],"class_list":["post-16938","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-crypto-news","category-finance","tag-crypo-market","tag-crypto","tag-sec"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>SEC Proposes Crypto Self-Custody Rules for Funds \u2014 But Who Checks the Keys? - Crypto News<\/title>\n<meta name=\"description\" content=\"The SEC has proposed rules that could let some investment advisers and funds self-custody crypto. 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