SEC's Crypto Custody Shift Sparks Debate: Innovation vs. Investor Protection

The U.S. Securities and Exchange Commission (SEC) has taken a significant step to expand the universe of entities authorized to custody crypto assets, signaling a shift in regulatory approach under Chairman Paul Atkins. In a no-action letter issued by the SEC's Division of Investment Management, the agency clarified that registered investment advisers and funds may treat state-chartered trust companies as "banks" for holding digital assets without facing enforcement action under custody provisionsU.S. SEC Takes Preliminary Step to Expand Universe of Crypto Custody to State Trusts^[2]. This move effectively allows firms such as Coinbase and Kraken, which operate trust subsidiaries, to participate in crypto custody services, a sector previously constrained by regulatory ambiguity. The decision reverses prior enforcement strategies under former Chair Gary Gensler, who had proposed restrictions that excluded exchanges from custodial rolesU.S. SEC Takes Preliminary Step to Expand Universe of Crypto Custody to State Trusts^[2].

The no-action letter is part of the SEC's broader Project Crypto initiative, which prioritizes structured rulemaking over punitive enforcement. Chairman Atkins has emphasized the need to create a regulatory framework that supports innovation while ensuring investor protectionsSEC Permits In-Kind Creations and Redemptions for Crypto ETPs^[4]. The agency's Crypto Task Force, established in Q2 2025, has hosted roundtables on custody, staking, and decentralized finance (DeFi), engaging industry experts to shape policySEC Announces Agenda, Panelists for Roundtable on Crypto^[1]. These efforts align with President Donald Trump's goal of positioning the U.S. as a global crypto leader, though the shift has drawn criticism from some commissioners.

Democratic Commissioner Caroline Crenshaw opposed the no-action letter, arguing it undermines federal efforts to establish a uniform regulatory standard and creates a "50-state regulatory roulette" for investorsU.S. SEC Takes Preliminary Step to Expand Universe of Crypto Custody to State Trusts^[2]. She highlighted concerns that the decision favors crypto firms over traditional banks seeking federal charters through the Office of the Comptroller of the Currency (OCC). Meanwhile, Commissioner Hester Peirce, who has long advocated for crypto-friendly policies, supported the move, urging the SEC to update custodial rules to accommodate technologically advanced entitiesU.S. SEC Takes Preliminary Step to Expand Universe of Crypto Custody to State Trusts^[2].

Industry stakeholders have reacted cautiously. The no-action letter removes immediate compliance risks for firms using state trusts, but broader regulatory clarity remains pending. The SEC has announced plans to propose formal rules on crypto custody, issuance, and trading in the coming monthsSEC Permits In-Kind Creations and Redemptions for Crypto ETPs^[4]. Firms are advised to reassess their custody strategies, as the new policy could incentivize traditional financial institutions to enter the crypto market while reducing reliance on centralized exchanges.

The decision also reflects a broader trend of regulatory modernization. Alongside the no-action letter, the SEC has approved in-kind creation and redemption mechanisms for crypto exchange-traded products (ETPs), reducing costs and enhancing market efficiency. These changes, coupled with streamlined approval processes for crypto ETFs, signal a more accommodating stance toward digital assets. However, challenges persist, including ongoing prosecutions by the Department of Justice (DOJ) against developers of privacy-focused tools like Tornado Cash.

As the SEC continues to refine its approach, the crypto industry faces a critical juncture. While the no-action letter and related reforms provide short-term relief, long-term stability will depend on Congress and federal agencies aligning on a cohesive regulatory strategy. For now, the SEC's actions underscore a pivot toward innovation-friendly oversight, though debates over balancing investor protection and market growth will likely persist.