The Securities and Exchange Commission’s proposed cryptocurrency custody fallback could expand investment options while streamlining how larger advisory firms provide them.
According to the agency’s economic analysis, the costs associated with securing assets and organizing independent oversight may cause smaller firms to skip offering the service.
The proposal, approved on Oct. 1, would permit advisers to hold covered client crypto assets when an eligible custodian is unavailable, provided certain safeguards are met. Table 8 outlines specific annual expenses of $433,833 per adviser using this alternative.
While that figure accounts for an independent control report, it omits certain potentially substantial technology expenses.
As a result, clients might find that an asset is accessible through an adviser with robust custody infrastructure while remaining unavailable via another firm.
SEC Commissioner Hester Peirce differentiated adviser “self-custody” from investors holding their own assets. In this scenario, an intermediary—potentially holding a non-controlling portion—would retain clients’ key materials, meaning clients would still rely on that intermediary’s protections.
For standard advisory clients, the proposed amendments apply to crypto assets classified as funds or securities, whereas the scope for regulated-fund accounts covers securities or comparable investments.
What the annual estimate includes
The independent internal control report represents the largest modeled annual expense. The SEC estimates its average cost at $376,000, combined with $57,833 for recurring internal compliance tasks.
Table 8 aggregates these figures and lists an initial internal compliance expense of $173,499 separately, with all figures expressed in 2026 dollars.
| Modeled adviser cost | Amount | Timing |
|---|---|---|
| Internal compliance work | $173,499 | Initial |
| Internal compliance work | $57,833 | Recurring annually |
| Independent internal control report | $376,000 | Annual estimate |
| Table 8 adviser annual subtotal | $433,833 | Internal work plus control report |
The internal projections calculate 300 initial hours and 100 ongoing annual hours priced at $578.33 per hour. This covers informational materials, communications, and a formal agreement between the adviser and client to classify the asset as a financial asset under relevant state law.
The subtotal excludes certain technology, software, hardware, and related systems and processes. The SEC anticipates these expenses will be economically significant. Furthermore, recordkeeping and disclosure obligations appear in separate tables, meaning the subtotal does not function as a comprehensive operating budget.
The accountant figure originates from an inflation-adjusted previous estimate within the Paperwork Reduction Act analysis, rounded to the nearest $1,000 in accordance with the agency’s historical cost framework. Report expenses may fluctuate based on the specific assets, safeguarding mechanisms, and expertise required to audit different blockchain networks.
For its burden calculation, the agency presumes that roughly 823 advisers—representing 5% of the 16,442 registered advisers—will utilize self-custody, though it warns actual adoption rates could be lower.
Scale changes the cost of access
The economic analysis explicitly projects that smaller advisers might opt against self-custody, whereas larger firms may possess the necessary resources to satisfy the safeguards. It also points out opportunities to distribute certain expenses across a broader client roster, multiple assets, or affiliated enterprises.
This dynamic introduces a clear advantage without mandating a universal minimum firm size. An organization with extensive overall assets might only manage a tiny fraction of covered crypto assets requiring this fallback.
Conversely, a firm specializing in crypto may already possess the expertise and framework that other businesses would need to build from scratch.
When expenses remain fixed, a shared cost places a heavier burden on a small volume of assets than a large one. Firms might choose to distribute expenses across their broader operations rather than billing only those clients utilizing the fallback.
The SEC anticipates that numerous direct expenses will likely be transferred to clients via fees or charges. Handling a greater volume of assets and networks can demand more sophisticated controls and specialized accounting expertise, thereby raising overall expenditures. The primary advantage lies in scaling or repurposing existing infrastructure.
Accountant pricing remains unpredictable; the SEC cautions that high demand for professionals qualified to evaluate crypto controls could make these services difficult to secure, particularly for smaller advisers lacking strong negotiating leverage.
An option that can expire for each asset
The proposed fallback relies on the adviser establishing a written, reasonable basis—following appropriate due inquiry—that no qualified custodian is willing to maintain a specific asset.
Advisers would be required to make this determination prior to taking custody and at least once every quarter thereafter. Custodial fees cannot serve as the justification for this conclusion.
An adviser cannot opt for the fallback simply because a self-custody setup appears less expensive. The decisive factor is whether an eligible custodian exists for that asset under the outlined conditions.
As soon as an adviser discovers that a qualified custodian has become accessible, it must transfer the asset to that custodian as promptly as reasonably possible. This requirement can be triggered between quarterly assessments, and the proposal does not outline a single universal transfer deadline.
A business might spend money to support a particular asset only to be forced to remove it from adviser custody later. Such eligibility shifts could also leave the firm with a very limited assortment of unsupported assets over which to divide remaining costs.
If no client crypto assets remain in self-custody by the filing deadline, the report is waived. This could lower expenses for temporary arrangements, though advisers keeping other covered client crypto assets in self-custody remain bound by the requirement.
The safeguards buy independent scrutiny
These expenditures accompany a shift in asset possession. An investment adviser would simultaneously hold client key materials, introducing risks of misuse, misappropriation, and operational mistakes. Any lower-cost framework must be evaluated alongside those operational hazards.
As noted in SEC Commissioner Mark Uyeda’s statement, the proposed criteria incorporate safeguarding expertise, cybersecurity defenses, annual reviews, reporting protocols, and client disclosures.
Advisers would need asset-specific competence and infrastructure for key management, authorization protocols requiring two or more designated individuals, and strict segregation of individual client holdings.
The inaugural independent control report would be due within six months of adopting self-custody and at least annually thereafter. It must evaluate the design, implementation, and efficacy of internal controls while verifying reconciliation with the underlying crypto network.
This provides an extra layer of oversight that goes beyond an adviser’s internal evaluation of its own capabilities.
Quarterly client reporting is also mandated, though electronic alternatives and exemptions exist for qualifying audited pools and regulated funds. While client visibility into balances and transactions supports existing safeguards, an accountant’s audit addresses questions that simple balance sheets cannot resolve.
These protections will not eradicate custodial risk, and the SEC emphasizes that high spending does not automatically equate to safeguarding competence. A firm’s financial capacity to absorb compliance costs is distinct from the operational effectiveness of its client protection systems.
Alternatives could soften the scale advantage
In a statement dated Sept. 30, 2025, SEC Commissioner Hester Peirce outlined conditional staff no-action relief for specific state trust companies, while highlighting national and state banks as additional acceptable custodians.
The October proposal would likewise permit qualified state trust companies to custody crypto assets, subject to initial and ongoing annual due inquiry regarding their authorizations and safeguards. When an eligible financial institution supports an asset, clients may gain access without requiring their adviser to establish the proposed fallback framework.
The cost advantages of this approach would vary depending on the specific asset and custody structure, given that a firm authorized to offer crypto custody does not automatically support every asset a client wishes to hold.
Ultimately, the key question for investors is whether the proposal will deliver practical access at a reasonable cost and protection level. The SEC’s analysis indicates a likely advantage for advisory firms with robust resources and scalable infrastructure.
The extent to which clients ultimately benefit will hinge on actual implementation expenses, independent accountant pricing, and the specific assets that eligible custodians choose to support.