The SEC has issued a no-action letter allowing SEC-registered advisers and funds to treat state trust companies as 'banks' for crypto custody, broadening custodial options.

This guidance enables regulated investment advisers and funds to use state-licensed trust companies to hold cryptocurrencies like Bitcoin and Ethereum, provided they follow specific safeguards.

State trust companies can serve as crypto custodians if they adhere to safeguards such as asset protection procedures and due diligence, ensuring client interests are prioritized.

SEC Commissioners Hester Peirce and Caroline Crenshaw expressed differing views; Peirce supported rule updates for tech-savvy companies to custody assets, while Crenshaw criticized the move for bypassing formal rulemaking.

This policy shift comes amid broader regulatory tensions, including restrictions by the Federal Reserve and Treasury Department on how banks and crypto firms interact, exemplified by Operation Choke Point 2.0.

The development marks a significant move towards easing restrictions and increasing acceptance of crypto custody amid ongoing regulatory pressures.

The SEC's crypto policy efforts are part of 'Project Crypto,' with plans to issue formal rules soon, amid legislative progress toward comprehensive digital asset regulation.

This move is an interim step toward modernizing custody rules, with the SEC planning amendments to existing regulations under the Investment Company and Advisers Acts.

The guidance was prompted by a request from law firm Simpson Thacher & Bartlett, representing a step toward broader custody rule reforms.

SEC Commissioner Hester Peirce welcomed the guidance, stating it reduces uncertainty for advisers and could lead to principles-based modernization of custody rules.

Wyoming Senator Cynthia Lummis supported the move, highlighting her state's early recognition of trust companies as crypto custodians and its influence on SEC decisions.

Industry analysts and crypto traders praised the move for providing clarity and promoting crypto adoption, with expectations of increased qualified custodians.

The move signals a willingness to integrate crypto assets into traditional financial frameworks, potentially boosting ETF approvals and institutional strategies.