On September 30, 2025, the Securities and Exchange Commission (SEC) Division of Investment Management issued a no-action letter stating that it would not recommend enforcement action under the custody provisions of both the Investment Advisers Act of 1940 and the Investment Company Act of 1940 if registered investment advisers (RIAs) and registered investment companies (RICs) use a state trust company as a “bank” for custodial purposes for crypto assets and related cash or equivalents.
The Custody Framework
Under the existing custody provisions of the Advisers Act and Investment Company Act, RIAs and RICs are required to place securities and other similar investments in the custody of specified institutions, such as banks. The definition of “bank” under both Acts includes a trust company provided that it is supervised by either state or federal authorities, exercises fiduciary authority similar to national banks, and is not structured to evade regulatory requirements.
The SEC acknowledged that determining whether a state trust company meets this definition involves a facts-and-circumstances analysis, especially whether a “substantial portion” of its business involves exercising fiduciary powers or receiving deposits.
Rationale for No-Action Relief
The SEC based its rationale on the assertion that state trust companies play a critical role in crypto custody and have developed robust controls to ensure the safeguarding of crypto assets, including:
- “Deep” cold storage of crypto assets.
- System and organization controls reports (e.g., SOC-1 and SOC-2 reports).
- Third-party audits of financial statements.
- Cybersecurity, encryption, and business continuity protocols.
- Private key management.
This rationale is further based on the assertion that the controls are implemented according to state regulations that include licensing and supervision requirements, capital minimums, and enforcement authority.
Legal Scope and Limitations
The SEC’s no-action letter does not alter existing law or create new obligations. It reflects the Division of Investment Management’s position on enforcement action and is contingent on the specific facts and representations made in the letter it responded to. All requirements under the custody provisions of the Advisers Act and the Investment Company Act remain in effect.
Implications for SEC Treatment of Crypto
The SEC’s no-action letter acts as another signal that the agency is tempering its enforcement-first policy toward the crypto industry.
In 2024, Galois Capital Management LLC was subject to the first SEC enforcement action using the Advisers Act’s Custody Rule against crypto assets. The SEC alleged that Galois placed certain crypto assets in accounts on digital asset trading platforms that did not qualify as qualified custodians under the Custody Rule. Galois eventually settled.
However, the SEC’s policy toward crypto has changed markedly since the beginning of 2025. In an interview with the Financial Times on September 15, 2025, SEC Chair Paul Atkins stated that the agency would be departing from aggressive enforcement actions against the crypto industry and instead would be giving advance notice of violations before bringing any enforcement actions.
SEC Commissioner Hester Peirce, who serves as the head of the SEC’s Crypto Task Force, doubled down on Atkins’s approach in her statement emphasizing the no action letter’s positive impact on the crypto industry, RIAs, RICs, and ultimately investors by providing clarity on crypto asset custody.
In contrast, SEC Commissioner Caroline Crenshaw also released a statement on the no-action letter, arguing it paves the way for state trust companies that are subject to less regulation and oversight to be the ones entrusted with safeguarding investors’ crypto assets, which have a high risk of loss.
Takeaways
The SEC’s no-action letter relief may lead to broader use of state trust companies for crypto asset custody, which could allow RIAs and RICs to explore more opportunities to use innovative digital asset strategies while remaining in compliance with applicable regulations.
Advisers and investment companies considering this approach for crypto assets should conduct thorough due diligence, provide clear disclosures, maintain robust contractual safeguards, and determine whether state trust companies are in their clients’ or shareholders’ best interests.
Moreover, the no-action relief appears to signal the SEC’s continued adoption of a more tempered view on regulating the crypto industry as opposed to the aggressive enforcement actions brought by the agency until 2025.
Alston & Bird can assist clients in evaluating crypto custody options, conducting regulatory assessments, and preparing disclosures and agreements aligned with SEC guidance.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team or one of the attorneys on our Capital Markets & Securities team.
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