On 25 April 2025, United States Securities and Exchange Commission (US SEC) Commissioner Hester M. Peirce delivered a statement at the Crypto Task Force’s latest roundtable on custody. Using a vivid metaphor likening the current regulatory landscape to a perilous “lava game,” Commissioner Peirce argued that the absence of clear, practical regulations on crypto custody is stifling market development, forcing regulated entities into risky darkness while disincentivising safe innovation. She urged US SEC to build clear legal pathways (“walkways over the lava”) rather than obstructing market evolution, and proposed that regulations must accommodate blockchain-native custody methods such as self-custody, smart contracts, and tokenized securities, without forcing traditional intermediation models.
Definitions
Crypto Custody: The safeguarding of digital assets (such as cryptocurrencies or tokenized securities) by an intermediary, regulated custodian, or through self-custody by the owner.
Special Purpose Broker-Dealer Framework: A regulatory carve-out permitting certain broker-dealers to custody digital asset securities under specific conditions, established by the United States Securities and Exchange Commission in 2020.
Self-Custody: Ownership and direct control of crypto assets by the individual or entity without relying on an intermediary, enabled by private keys and blockchain wallets.
Tokenized Securities: Traditional financial instruments (like shares, bonds) represented digitally on a blockchain, with programmable features like embedded compliance, voting rights, and settlement protocols.
Commissioner Peirce framed the current regulatory confusion around crypto custody as unsustainable without clear custody rules, brokers, investment advisers, and investment companies are hesitant or unable to participate in crypto markets. She notes that regulated markets and intermediaries are being handicapped, leaving space for unregulated and potentially riskier alternatives to dominate, harming American investors. The United States Securities and Exchange Commission must build transparent regulatory paths that facilitate both intermediated and self-custodied crypto assets, reflecting technological innovation instead of resisting it.
She specifically called for recognising that self-custody may be the safest, most effective model for certain crypto assets and aims at updating custody frameworks to allow for blockchain-native solutions (e.g., on-chain control, smart contracts). Further, reconsidering the Special Purpose Broker-Dealer regime and adapting rules like Rule 15c3-3 to better reflect blockchain asset realities and clarifying how US SEC rules on custody, settlement, and financial reporting apply when smart contracts or distributed ledgers are involved.
Commissioner Peirce’s remarks included ten targeted questions challenging whether United States laws like SIPA, the Uniform Commercial Code, and the US SEC’s existing broker-dealer and custody rules need urgent amendments to accommodate crypto asset innovations.
- Call for Clear Custody Rules: The United States Securities and Exchange Commission must end regulatory ambiguity and explicitly define how brokers, advisers, and funds can custody crypto assets.
- Legitimisation of Self-Custody: Self-custody models should be recognised as valid, regulated alternatives — especially for blockchain-native digital assets.
- Smart Contract Settlement Recognised: Rules must adapt to brokers using blockchain protocols and smart contracts for clearing and settlement activities.
- Structural Revisions Proposed: Commissioner Peirce raised the possibility of amending SIPA to address crypto-specific insolvency risks and called for adapting custody rules to tokenized securities.
Compliance and Market Implications
- Broker-Dealer Compliance: Broker-dealers will require new guidance on handling tokenised securities, smart contract settlements, and holding non-securities crypto assets securely.
- Custodian Evolution: New classes of qualified custodians could emerge — including blockchain-native entities — if rules incorporate qualitative standards instead of rigid entity lists.
- Fund and Adviser Operations: Investment funds and advisers may soon have the ability to self-custody crypto assets under tailored fiduciary and safeguarding standards, expanding investment strategies.
- Regulatory Innovation Needed: Without adaptive custody regulations, the United States risks pushing crypto market activity offshore or into unregulated sectors.
The United States Securities and Exchange Commission is being internally pushed toward adapting custody, capital, recordkeeping, and insolvency protections for a blockchain-native asset world. Recognition of self-custody and programmable smart contracts as legitimate components of financial infrastructure is gaining institutional acceptance. Custody rulemaking may bifurcate into asset-type-specific approaches — distinguishing between cryptocurrencies, tokenized securities, and hybrid instruments.
