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The Simpson Thacher & Bartlett relief provides much needed clarity for crypto assets. The SEC allowing state-chartered trust companies to act as crypto custodians expands options for advisers, but the relief is conditional on strict criteria and is not a formal rule change.
The custody of digital assets has long been one of the most uncertain areas in U.S. investment adviser regulation. The SEC’s current Custody Rule predates the emergence of crypto assets and contains no express reference to how such assets should be safeguarded. As a result, advisers holding or advising on digital assets have faced persistent ambiguity around what qualifies as “possession or control” and who can serve as a “qualified custodian.”
In early 2023, SEC Chair, Gary Gensler sought to close that gap through a proposed Safeguarding Rule, which would have expanded the custody framework to encompass a broader range of assets, including crypto. The proposal, however, drew substantial industry criticism regarding its feasibility and reach and was ultimately among the fourteen rulemakings withdrawn in 2025 as the SEC recalibrated its rulemaking agenda.
Against that backdrop, the September 30, 2025 no action letter from the SEC’s Division of Investment Management to Simpson Thacher & Bartlett LLP represents a narrower but more practical development. It provides long awaited clarity (though limited in scope) on when a state-chartered trust company may be treated as a “bank” for purposes of the custody provisions in Rule 206(4)-2 and the Investment Company Act of 1940.
While not a formal rule change, the SEC’s position offers a concrete framework for advisers exploring digital asset custody solutions that fall short of federal bank status. It also signals a more pragmatic posture from the SEC, reflecting a willingness to acknowledge evolving custody models so long as they are supported by strong oversight, effective internal controls, and transparency.
Relief in brief
The SEC stated that it would not recommend enforcement action under the custody provisions of the Advisers Act or the Investment Company Act of 1940 if client or fund assets, including digital assets and related cash, are maintained with a state-chartered trust company that meets specific conditions.
The relief depends on several factual representations:
- The trust company is authorized by its state banking authority to provide custody of digital assets and related cash.
- It maintains comprehensive policies, procedures, and internal controls designed to safeguard those assets, including cybersecurity measures, key management systems, and independent operational audits.
- The adviser or fund conducts ongoing due diligence, reviewing the custodian’s financial statements and SOC 1 or SOC 2 internal control reports each year.
- The custody agreement prohibits any pledging, rehypothecation, or use of client assets without prior written consent.
The SEC emphasized that this position applies only while these facts remain accurate. Any material change, such as a modification in the custodian’s control environment, regulatory standing, or internal audit coverage, could cause the staff to take a different position.
Why it matters
For years, advisers seeking to provide digital asset exposure to clients have faced a difficult choice. They could rely on a small number of federally chartered institutions willing to engage in crypto custody, or work with state trust companies operating under varying state regimes, often without clear assurance that they qualified as “banks” under the Custody Rule.
The new no action letter helps close that gap. It confirms that properly supervised state trust companies can, under certain conditions, satisfy the “qualified custodian” requirement. This represents a meaningful step forward from the uncertainty that followed the SEC’s 2023 Safeguarding Rule proposal, which sought to broaden the custody framework but left many crypto custodians in regulatory limbo.
Although the relief does not amend the Custody Rule itself, it marks the first clear recognition by SEC staff that state chartered trust companies engaged in digital-asset custody may operate within existing law, provided they maintain the same standards of control, examination, and asset segregation expected of traditional banks.
Practical implications for investment advisers
For advisers already engaged in considering digital-asset strategies, the letter has several practical implications:
Expanded but conditional custody options
Firms may now evaluate state trust companies alongside federally chartered institutions, increasing the number of viable custody providers. Eligibility, however, depends on the trust company’s licensing, financial condition, and governance, which must align with the representations described in the letter.
Contractual precision
Custody agreements should reflect the limitations outlined in the letter, particularly prohibitions on rehypothecation and requirements for prompt asset delivery upon demand. Firms should confirm that wallet structures, key management, and omnibus arrangements are explicitly detailed.
State supervision as a compliance benchmark
Because the relief depends on state oversight, advisers must verify that each trust company operates within a supervisory regime that includes regular examinations, capital minimums, and the filing of call reports with its state authority.
Ongoing oversight
Advisers should establish procedures to ensure that each representation remains accurate, especially when a custodian changes business lines, auditors, or technology providers.
Limits and caution
To be clear, the letter reflects the staff’s current enforcement approach rather than a rule change or a binding exemption.
The relief applies only to the specific facts presented. Other custodial models, even those with comparable controls, cannot assume the same treatment without separate review or confirmation. The SEC staff may revise or withdraw its position at any time.
Advisers should also recognize that custody risk extends beyond digital assets. Fiat conversions, stablecoin transactions, and sub-custody arrangements remain outside the letter’s explicit scope. The relief should therefore be viewed as a framework for potential application rather than a definitive approval.
Progress, not permission
The Simpson Thacher no action letter represents progress toward clarity, not unrestricted permission. It provides advisers with a roadmap for working with state-chartered trust custodians in a compliant and carefully monitored manner, but only if those custodians maintain the same discipline, transparency, and control environment described to the SEC.
For firms balancing innovation with fiduciary duty, this is a timely opportunity to strengthen custody oversight, re-evaluate service providers, and prepare for future regulatory developments.
As the SEC continues to refine its approach, one principle remains constant: custody is the cornerstone of investor protection, and in the era of digital assets that foundation must be both modern and rigorously supervised.
How Ocorian can help
Ocorian’s U.S. regulatory and compliance team supports investment advisers across every stage of custody oversight. Our specialists help firms evaluate and select qualified custodians, perform and document due diligence, and design custody controls aligned with SEC expectations.
To discuss how this no action relief may affect your custody framework or broader compliance program, contact our team.
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