On 30 September 2025, the U.S. Securities and Exchange Commission (US SEC), through its Division of Investment Management, issued a no-action letter permitting state-chartered trust companies to act as custodians for crypto assets under the United States Investment Advisers Act of 1940 and the United States Investment Company Act of 1940. The relief allows investment advisers, registered investment companies, and business development companies to treat certain state trust companies as “banks,” provided they operate under state supervision and possess fiduciary authority. The decision triggered immediate dissent from US SEC Commissioner Caroline A. Crenshaw, who issued a strongly worded statement titled “Poking Holes: Statement in Response to No-Action Relief for State Trust Companies Acting as Crypto Asset Custodians.” Crenshaw warned that the new relief dilutes investor protections embedded in federal custody regulations and bypasses statutory due process, underscoring the need for formal rulemaking on digital asset custodianship.
The US SEC’s no-action relief enables state trust companies supervised under state banking authority to act as crypto asset custodians. The relief applies if custodians adhere to anti-commingling rules, maintain client asset segregation, and implement secure storage measures, including encryption and deep-cold storage systems. Commissioner Crenshaw’s statement challenges this action, arguing it undermines federal prudential standards while introducing regulatory inconsistency. Her response emphasises that core custodial protections under the United States Investment Advisers Act and United States Investment Company Act exist to safeguard public trust by ensuring client assets truly exist, a principle forged after historical fraud cases such as Madoff and Stanford International Bank Ltd.
Custody Framework and Investor Protection
“Degrading our custody framework is a serious matter. The statutes and rules regarding custody are what stand between American investors and the risk of theft, loss, or misappropriation of their assets.”
Commissioner Crenshaw publishing her dissent reiterates that the US SEC’s custody rules exist to protect investors through oversight and accountability. She expressed concern that the new relief “erodes rules to pave the way for custodians who admit they do not meet current standards.”
Relief Without Legal or Factual Justification
“Today’s no-action position lacks factual support in key areas and provides scant legal justification for poking holes in core statutory protections.”
Crenshaw asserts that the agency’s justification rests on a false presumption that no compliant custodial entities exist. She argues the no-action relief “jumps the gun,” preempting ongoing Commission rulemaking and granting state trust companies privileges historically limited to federally chartered institutions monitored by the Office of the Comptroller of the Currency (OCC).
Comparative Risk: State Trust Companies vs. Banks
“State trust companies differ from traditional custodians.” Crenshaw details that qualified custodians under federal law include banks, broker-dealers, and futures commission merchants. Banks undergo OCC examinations, maintain segregated accounts, and benefit from federal receivership oversight in case of insolvency. State-chartered trusts, she concludes, fall under “an inconsistent hodgepodge of less rigorous rules” varying across jurisdictions such as Wyoming and New York, which have developed crypto-specific charters.
Regulatory Disparity and Compliance Burden
“With today’s action, state trust companies can bypass the entire OCC application process.” Crenshaw elaboerates fairness concerns, arguing that relief disadvantages compliant applicants seeking national charters. The uneven supervisory environment, described as “fifty-state regulatory roulette,” undermines market integrity and consistent investor protection standards envisioned by Congress in the United States Advisers Act and the United States Investment Company Act.
Crypto Exception and Custody Regime Integrity
“No idea! This relief doesn’t contemplate the idea of allowing state trust companies to custody anything other than crypto assets.” Crenshaw points to selective treatment of crypto assets despite their high fraud risk i.e. losses from cryptocurrency-related fraud exceeded USD 5.6 billion in 2023 according to the FBI’s Internet Crime Complaint Center.
Procedural Integrity and Rulemaking Necessity
“Executing a shift of this magnitude via no-action relief without public comment and without any economic analysis is ill-advised.”
Crenshaw cautions that this circumvention of rulemaking may conflict with the Administrative Procedure Act and undermine the Commission’s own Spring 2025 Regulatory Flex Agenda, which lists pending custody rule amendments. Her critique frames the relief as an “easy way out” that could preempt formal policymaking.
Compliance Interpretation
“The NAL does not expand the definition of a permissible custodian under the Advisers Act and 1940 Act. Rather, it provides a staff position regarding the use of entities for crypto asset custody that I would contend already are permissible custodians.”
From a compliance standpoint, this means:
- Enforcement posture only: The NAL represents a conditional staff position. Firms relying on it must maintain written records proving equivalence of oversight, capital adequacy, and fiduciary safeguards between the chosen state trust company and an OCC-supervised bank.
- Rule 206(4)-2 (Custody Rule) remains fully applicable i.e. segregation of client assets, recordkeeping, reconciliation, and annual surprise audits continue unchanged.
- Disclosure requirements under Form ADV Items 9 and 15 must be updated to describe the nature and scope of the custody arrangement.
- Audit documentation must evidence segregation, access controls, and proof-of-reserve reconciliation.
Scope of the No-Action Letter
The NAL applies only to crypto assets that qualify as “funds and securities” under the Advisers Act or “securities and similar investments” under the 1940 Act. It also extends to tokenised equity and debt instruments. The NAL does not apply to unregistered or purely utility-based crypto tokens outside the portfolio of a registered adviser or fund.
