The U.S. Securities and Exchange Commission (SEC) has submitted a proposal to overhaul its cryptocurrency custody rules to the White House for regulatory review. The proposal is now under consideration by the Office of Information and Regulatory Affairs, a division of the Office of Management and Budget that evaluates federal regulations before they are formally published.

Why Are Custody Rules Important for Crypto Investment?

Custody refers to the safekeeping of digital assets on behalf of clients. Think of it like a bank holding your money, except for cryptocurrency. The SEC said it has received numerous questions from investment advisers about how they can custody digital assets for clients while complying with existing regulatory requirements. The proposed rulemaking would clarify the custody framework applying to crypto assets held by investment advisers and investment companies, addressing a gap in current guidance that has created uncertainty in the market.

The SEC's goal is to modernize certain provisions that the agency considers outdated or unnecessarily burdensome following changes in financial markets, securities trading, and asset-holding practices. Importantly, the agency said it aims to remove unnecessary requirements without weakening investor protections. This balancing act reflects a broader shift in how regulators are approaching crypto policy under SEC Chair Paul Atkins.

What Does This Proposal Mean for the Broader Crypto Regulatory Landscape?

The custody proposal forms part of a wider shift in digital asset policy under SEC Chair Paul Atkins. Over the past year, the agency has published guidance clarifying its position on several areas of the cryptocurrency market. This includes its view that memecoins are generally not securities and its explanation of which staking activities may fall outside federal securities laws. Staking refers to the process of locking up cryptocurrency to validate transactions on a blockchain network.

The SEC has also worked with the Commodity Futures Trading Commission (CFTC) to clarify how existing laws apply to digital assets and related transactions. Last week, the SEC proposed "Regulation Crypto Assets," or Reg Crypto, a tailored framework governing certain digital asset offerings. The agency said the proposed regime is intended to help companies raise capital while maintaining protections for investors. Reg Crypto builds on joint SEC and CFTC guidance released in March, which clarified how federal securities laws apply to various cryptocurrencies and digital asset transactions.

How to Understand the Regulatory Review Process

The White House review is a critical step in the federal rulemaking process, but it does not mean the changes have taken effect. Here's what happens next:

• Office Review: The Office of Information and Regulatory Affairs evaluates proposed regulations before publication, including their potential economic effects and consistency with the administration's policy priorities.
• Formal Publication: After White House review, the SEC would still need to formally publish the rulemaking and complete the applicable regulatory process before adopting a final version.
• Public Comment Period: Once published, the proposal would typically enter a public comment period allowing industry stakeholders and the public to provide feedback before final adoption.

This multi-step process means the custody rule changes are still months away from becoming final policy, but their submission to the White House signals that the SEC is moving forward with its modernization agenda.

Market participants are also waiting for the SEC's planned innovation exemption, which SEC Chair Atkins has said he intends to introduce. The framework would accelerate the launch of cryptocurrency products and provide regulatory relief for qualifying companies. The exemption could benefit firms seeking to issue tokenized securities, which are digital representations of ownership in real-world assets, through decentralized networks and other emerging trading platforms. However, the SEC has not yet formally introduced the framework or provided a definitive timetable for its implementation.

The custody proposal reflects a pragmatic approach to regulation: acknowledging that the crypto industry has evolved faster than the rules governing it, while maintaining the core investor protections that securities laws are designed to provide. For investment advisers and their clients, clearer custody rules could reduce compliance uncertainty and potentially lower costs associated with holding digital assets.