SEC Proposes Crypto Custody Fallback
The US Securities and Exchange Commission’s proposed crypto custody fallback could broaden investment choices for clients while making them easier for larger advisers to offer. Approved on Oct. 1, the proposal permits advisers to hold covered client crypto assets when an eligible custodian is unavailable, subject to specific safeguards.
However, the agency’s economic analysis indicates that the expense of safeguarding assets and arranging independent oversight may lead smaller firms to decline to offer the service. For ordinary advisory clients, the adviser amendments concern crypto assets that are funds or securities, while the relevant scope for regulated-fund accounts includes securities or similar investments.
Breakdown of Modeled Compliance Costs
Table 8 of the SEC proposal models certain annual costs at $433,833 per adviser using the self-custody option. This figure includes initial internal compliance work of $173,499 and recurring annual internal compliance work of $57,833. The largest modeled annual component is an independent internal control report, with an estimated average cost of $376,000 in 2026 dollars.
The internal estimate assumes 300 initial hours and 100 recurring annual hours at a rate of $578.33 per hour. It covers information, communications, and an agreement between the adviser and client to treat the asset as a financial asset under applicable state law.
The subtotal notably excludes some technology, software, hardware, and associated systems and processes. The SEC expects those additional costs to be economically high. Furthermore, recordkeeping and disclosure burdens appear separately in other tables, meaning the subtotal does not serve as a complete operating budget. The agency estimates that approximately 823 advisers—representing 5% of the 16,442 registered advisers—would use self-custody, though it cautions actual uptake may be lower.
Scale Advantages and Market Impact
The economic analysis explicitly anticipates that smaller advisers may elect against self-custody, whereas larger advisers are better positioned to meet the required safeguards. Larger firms can share certain costs across a wider client base, multiple assets, or affiliated businesses, whereas a shared cost weighs more heavily on a smaller pool of assets.
Advisers may pass direct costs on to clients through fees or expenses. Additionally, the SEC warns that high demand for professionals who can assess crypto controls could make services harder to obtain, putting smaller advisers at a disadvantage due to lower bargaining power.
Quarterly Reviews and Operational Rules
The proposed fallback requires the adviser to have a written reasonable basis, determined after due inquiry and at least quarterly, that no qualified custodian maintains each asset. Custodian costs cannot form the basis of that determination. Once an adviser learns that a qualified custodian has become available, it must place the asset with that custodian as soon as reasonably practicable.
The required safeguards include asset-specific expertise and systems for key management, authorization by two or more designated people, and the segregation of each client’s assets. The first independent control report would be due within six months of taking self-custody and at least annually thereafter. Quarterly client reporting would also apply, alongside electronic alternatives and exceptions for qualifying audited pools and regulated funds.
Ultimately, how widely clients benefit will depend on firms' actual implementation costs, independent-accountant pricing, and the specific assets that eligible custodians begin to support.
