Crypto Is Taking Over Custody. Now It’s Coming for Banking.

Crypto’s merge into traditional finance is creating a new question. Who gets to hold digital assets, and under what rules? This week, the SEC proposed allowing investment advisers to self-custody certain crypto assets while opening custody to state trust companies. At the same time, community banks sued the OCC over its decision to let crypto firms operate as national trust banks. Together, the two developments show how crypto is beginning to redefine one of the oldest functions in finance: custody.

The SEC Opens a New Path for Institutional Crypto Custody

The SEC is proposing a new framework that would make it easier for investment advisers and regulated funds to hold crypto without forcing digital assets into custody rules designed for traditional finance.

On October 1, the SEC proposed the Adviser and Regulated Fund Custody Rules and Crypto Custody Rules, which would create two new custody options for crypto: allowing investment advisers to self-custody crypto under limited circumstances and allowing certain state-chartered trust companies to serve as crypto custodians.

The proposal applies primarily to registered investment advisers and regulated funds; however, it does not mean individual investors need SEC approval to self-custody their own crypto.

Institutional Self-Custody

Under existing institutional rules, investment advisers have to keep client funds and securities with qualified custodians such as banks or broker-dealers. However, crypto creates a problem for this because a custodian may not exist for every asset an adviser may want to hold.

The SEC's proposal resolves this problem. For example, if an adviser reasonably determines that no permitted custodian is available for a particular crypto asset, it could hold that asset itself on behalf of clients. The adviser would have to document that determination before taking custody and reassess the availability of a permitted custodian at least quarterly. If one later becomes available, the adviser would generally have to transfer the asset to it as soon as they practically can.

Self-custody would also entail crypto-specific controls; primarily, the adviser would need written policies governing private-key management. Moreover, transfers would require authorization from at least two individuals, preventing a single employee from moving client assets. This reduces key-man risk, but one could imagine that two people wouldn’t necessarily be better than one - hopefully more sophisticated authorizations will be created in the future. Moreover, to alleviate commingling, all digital assets would have to be segregated from the adviser's own assets, requiring additional blockchain authorizations.

Lastly, it’s important to note what this proposal is not. SEC Commissioner Hester Peirce emphasized that “self-custody” means something different here than it normally does in crypto. The proposal is not about investors holding their own private keys. Rather, it would allow an investment adviser, under limited circumstances, to hold clients' crypto private keys on their behalf, rather than placing those assets with an independent custodian.

State Trust Companies Become Crypto Custodians

The second major change would allow certain state trust companies to become permitted custodians for crypto assets and related cash or cash equivalents, even when they do not otherwise qualify as banks under existing federal custody rules.

However, there are conditions. Before using one, an adviser or regulated fund would have to determine whether the trust company is authorized by its state banking regulator to provide crypto custody services. It would also have to review the company's safeguards for private-key management and cybersecurity and repeat this due diligence annually.

The adviser or fund would also have to review the trust company's annual financial statements, which must be prepared in accordance with U.S. GAAP and audited by an independent public accountant. The proposal additionally requires controls intended to keep customer crypto segregated from the trust company's own assets.

This would give advisers and funds more options for where they hold crypto while preserving the same basic custody protections.

Same Protections, Different Infrastructure

The SEC is not getting rid of traditional custody protections. It is adapting them to blockchain. Commissioner Mark Uyeda made this point directly. Segregation and proper controls still matter, but securing paper certificates in a bank vault is not the same as securing assets on a distributed ledger.

Chairman Paul Atkins connected the proposal to the SEC’s other recent moves, including the DTC tokenization pilot, tokenized-securities guidance, Regulation Crypto Assets, and the Innovation Exemption.

The approach is simple. Keep the protections that work and rebuild the infrastructure around blockchain. Crypto is not replacing finance. It is changing how finance works.

Crypto Firms Are Becoming Banks, and Community Banks Are Fighting Back

While the SEC is expanding how investment advisers can custody crypto, a separate fight is developing over who should be allowed to provide those services. On October 2, the Independent Community Bankers of America (ICBA) sued the Office of the Comptroller of the Currency (OCC) over its decision to allow crypto firms to operate as national trust banks.

The dispute centers on the national trust bank charter, which allows a company to become a federally chartered bank without operating like a traditional commercial bank. Instead of taking deposits and making loans, a trust bank can specialize in services such as custody. That makes the charter particularly attractive to crypto companies, which can custody digital assets under federal supervision without becoming full-service commercial banks. ICBA argues that the OCC is stretching this charter beyond its intended purpose, giving crypto firms the advantages of a federal bank charter without all the requirements imposed on traditional banks.

The OCC strengthened this framework in March by finalizing a rule allowing national trust banks to engage in both fiduciary and related non-fiduciary activities. The agency changed its chartering rules from referring only to “fiduciary activities” to the wider “operations of a trust company and activities related thereto.” According to the OCC, this did not create a new charter or expand its authority. It clarified authority already granted under the National Bank Act. The OCC also noted that national trust banks already conduct non-fiduciary custody activities and hold nearly $2 trillion in custody or safekeeping accounts.

Crypto firms have increasingly used this route to enter the federal banking system. The OCC conditionally approved national trust bank charters or conversions for BitGo, Fidelity Digital Assets, Paxos, Ripple National Trust Bank, and First National Digital Currency Bank, and in April approved Coinbase National Trust Company. Applications are also pending from firms including Payward, Kraken's parent company, EDX, Zero Hash, and Builders Bank & Trust.

The ICBA's lawsuit challenges this expansion. It argues that Congress authorized national trust banks to perform fiduciary activities, not to grant crypto companies a backdoor into banking. This distinction matters because the firms can receive a federal charter without FDIC insurance or traditional capital/liquidity standards that apply to insured commercial banks. Furthermore, the ICBA argues that the charter can preempt certain state regulations, including consumer-protection rules, while still giving customers the impression that these firms offer the same protections as traditional banks.

The ICBA is asking the court to reverse the OCC’s expansion of the national trust bank charter, including its March 2026 rule and Interpretive Letter 1176. It also wants the court to overturn the OCC’s approval of Protego Holdings' charter (a firm offering digital asset custody, lending, and borrowing, etc.). Protego essentially serves as the test case for ICBA’s broader challenge to the OCC’s crypto banking policy.

The OCC takes the opposite position. Its March rule says national trust banks have long performed non-fiduciary activities and that replacing “fiduciary activities” with “operations of a trust company and activities related thereto” simply brings the regulation in line with the language of federal law. In the OCC's view, it is not creating a special banking system for crypto. It is applying an existing national trust-bank framework to new forms of financial activity.

That makes the fight bigger than crypto regulation. The question is no longer whether crypto firms can enter traditional finance. They already have. The fight is now over what those institutions become once they get there, and whether the existing definition of a bank has to change with them.