Cultivating Confidence: The Role Of Custody In Institutional Confidence – Public Trust And Oversight, SEC Commissioner Hester M. Peirce, Digital Assets Summit, Singapore, Sept. 30, 2025

Thank you to the Digital Assets Association for organizing this event and inviting me to participate. My views are my own as a Commissioner and not necessarily those of the SEC or my fellow Commissioners. I am appearing in digital form, which might be appropriate in light of today’s discussions on the tokenization of real-world assets. Had I been with you in person in Singapore, I would have urged you to join me in visiting the famous National Orchid Garden. I have an affinity for orchids because I managed to keep one alive for nearly fifteen years—an amazing feat given my complete lack of gardening skills. Plants that friends have entrusted to my care have not enjoyed similar good health. I have plucked good garden plants thinking they were weeds, inadequately shielded a prized pepper plant from the scorching sun, and under- or overwatered formerly flourishing trees. I am not a good custodian of plants, which brings me to today’s topic—crypto custody.

Currently, relatively few custodians serve the crypto asset markets. But competing custodians are jockeying for future market share. Banks contrast their own successful record, rooted in “comprehensive regulatory frameworks, rigorous supervision, proven risk management capabilities, and prudential mandates” with “several high-profile instances of major client asset losses in the crypto industry . . . , revealing the shortcomings of custody practices.”[1] Non-depository state-chartered trust companies that offer custody services operate under a shadow given the SEC’s failure to clarify whether they are qualified custodians. Technology providers play a large role in custodying crypto assets, but typically offer their services to regulated custodians rather than submitting to direct regulation.

For financial markets to thrive, investors must trust the entities that hold their assets for safekeeping. A trustworthy custodian protects customer assets from loss, destruction, and theft and is subject to a framework for protecting customer assets from creditors of the custodian and from competing claims by other customers if the custodian fails. Building trust is easier said than done, but, without it, people will hold on to their assets themselves and unnecessary friction will plague the financial system. While the crypto world rightly celebrates self-custody, it should not be their only option, particularly when investors engage the help of financial professionals to manage their investment portfolios.

Customers ordinarily do not have visibility into the internal custody practices of their custodian, at least until it is too late—when the assets are gone. My friend whose garden I was tending returned from her trip to discover the injury I had done to her garden while she was out of town—but the damage was irreversible at that point. Similarly, an investor might believe that her assets and funds are safe with a broker or a crypto exchange until she tries to withdraw them from her account and finds that they are gone through the custodian’s carelessness or malfeasance.

A common solution to the information asymmetry problem in custodial arrangements has been to rely on regulators to impose and enforce safeguarding requirements. Regulatory mandates for custodians may include segregation and recordkeeping requirements, prohibitions on commingling, activity limitations, surprise audit requirements, and internal control requirements. Market participants, such as investment advisers and broker-dealers, that entrust their customers’ assets to a third party must choose a custodian that satisfies regulatory requirements.

The provision of custody services is an age-old business, so regulatory frameworks are well-developed. While basic principles of good custody do not change, the changing nature of the assets being custodied and the risks that custodied assets face can affect what good custody looks like. Effective regulation must keep pace with market and technological developments. Keeping pace, though, may mean grounding rules in principles, rather than attempting to prescribe custodial practices. Even prescriptions that sounded eminently rational when adopted, can quickly lose their relevance and even impede efforts to protect investor assets.

Regulatory responses to market developments can undermine, rather than bolster, investor protection. If not grounded in commercial reality, protective measures can have the perverse result of preventing investors and other market participants from finding a suitable and affordable regulated custodian. Investors instead may turn to less safe markets and intermediaries. Alternatively, investors may not be able to hold the assets they want in their investment portfolios. The SEC’s Special Purpose Broker-Dealer framework for the custody of digital asset securities, for example, proved virtually unusable due to unrealistic constraints placed on participants.[2] Among other things, SPBDs cannot custody non-security crypto assets alongside crypto asset securities. The Crypto Task Force is working on providing more workable approaches for broker-dealers to comply with their custodial obligations under the Customer Protection Rule. As an initial step, the staff has explained that the SPBD framework is not the exclusive way to comply with that rule.[3]

SEC Staff Accounting Bulletin (“SAB”) 121 was another problematic regulatory step that impeded the provision of crypto asset custody. SAB 121, which SEC staff issued in 2022, made custodying crypto assets commercially impracticable for companies that could not afford the capital charges associated with having custodied assets on balance sheet.[4] Experienced custodians decided not to offer crypto custody. SAB 122, issued in January of this year, reversed that position,[5] although the necessary extensive technological investments to serve as a custodian in this area[6] and bank capital regulations may continue to prevent some traditional custodians, such as banks, from providing crypto custody.

Another example of a counterproductive regulatory effort was the 2023 safeguarding proposal. That proposal, which we abandoned this year, would have amended and expanded the scope of the custody rules for investment advisers.[7] This proposal would have complicated the provision of custody services for crypto assets and other assets by including so many prescriptions. Even though it was never adopted, the proposal has created problems for investment advisers through its assertion that most crypto assets are likely to be funds or crypto asset securities covered by the current rule, and thus must be maintained with a qualified custodian.

The Crypto Task Force is working with the public to address questions about how the SEC’s custody rules apply in the crypto context. We have received helpful input in response to a wide-ranging request for comment that I posted in February and in conversation at our roundtable on custody in April.[8] The custody roundtable, which included panels on broker-dealer custody and investment adviser and investment company custody is worth watching. The discussions highlighted some of the challenges facing market participants and the Commission with respect to custody of crypto assets. Panelists, for example, noted the dearth of technically capable custodians for some types of crypto assets, the treatment of crypto assets under the Securities Investor Protection Act, the need for clarity on who can serve as a qualified custodian for purposes of the Advisers Act, and the heightened cyber-risks that plague crypto assets. But panelists also noted the benefits that the technology underlying crypto can play in protecting investors. For example, public blockchains offer transparency and smart contracts can be used to control locking and unlocking of assets.

Accordingly, among the issues the Task Force is thinking about tackling is how the custody rules apply (or do not apply) to broker-dealers that use smart contracts to facilitate settlement in connection with self-custodial trading platforms. Although a broker-dealer may have control over customer assets to the extent that it controls the smart contract, applying existing custody rules to this activity may not make sense. Existing custody rules are generally designed to regulate firms that carry securities for customers on an ongoing basis. Ultimately, the SEC should engage in rulemaking in this area. As an interim step, SEC staff could update the so-called ATS three-step letter to address firms seeking to use smart contracts in their settlement processes.[9]

The SEC also should consider updating the rules governing permissible custodians for registered investment advisers and investment companies. Existing custody rules may stand in tension with advisers’ fiduciary duty to their clients. Assets held at a third-party custodian that meets regulatory requirements may be unsafe if the custodian lacks sophisticated knowledge of blockchain technology. Different crypto assets may require different technical expertise, so an adviser may not be able to find a regulatorily permissible custodian that supports a particular crypto asset or activities involving that crypto asset. When assets are safely custodied at a third party, the adviser may not be able to efficiently trade the assets or take other steps to maximize the yield on those assets. Liquid staking may mitigate the latter issue by facilitating staking without assets having to be taken out of custody.

We should use this moment as an opportunity to consider a principles-based custody framework for broker-dealers, investment advisers, and investment companies that can accommodate technological change and a wide range of assets. Perhaps registrants should be able to use custodians other than traditional financial institutions. Perhaps advisers with the technical ability to do so should be able to custody crypto assets themselves, a practice known as self-custody, although very different from an investor custodying assets for herself. “Self-custody” by investment advisers would have to be paired with measures that would protect client assets from unscrupulous and careless advisers. Perhaps exchanges should be able to custody customer assets to facilitate trading, but, as past events have demonstrated, on-exchange custody carries risks. To increase the ranks of qualified custodians, the SEC could provide more clarity around whether and how state trust companies can serve as qualified custodians, as contemplated by the Investment Advisers Act. The renewed willingness of the Office of the Comptroller of the Currency to allow banks to provide crypto custody may increase the ranks of qualified custodians.

Technology may help address or mitigate concerns previously addressed through regulation. Perhaps the clearest example is that distributed ledger technology allows market participants to transact at scale without reliance on a custodian or any other intermediary. Even where an investor prefers to use a custodian, which I suspect will be the case for many institutional investors who may be required to do so, this technology may mitigate information asymmetry and other issues through its transparency. Investors will be able to verify assets held by a custodian in real-time.

Proof of reserves, audits, and the transparency of the blockchain help combat the opaqueness that typically characterizes custody arrangements, but they are not a silver bullet. Custodied assets may be offchain, in omnibus wallets, onchain in privacy-protecting ways, bridged to another chain, or deployed in staking or DeFi protocols. Moreover, a custodian with nefarious intent can provide a misleading snapshot. My custody of other people’s plants offers an embarrassingly apt analogy. In an effort of which I am deeply ashamed, about thirty years ago, I contorted myself to take photos of the live remnants of an otherwise dead tree to ease my friend’s mind about the status of the treasured tree she had left in my care. Similarly, a proof that offers a temporal snapshot of assets being custodied may tell a customer little about how safe her assets really are.

We are not going to resolve all custody questions in this session or at this conference, but I welcome robust discussions that rigorously explore how regulators can facilitate the creation of effective custody infrastructure. I call on all of you to help foster healthy custody practices. Do not wait for a regulator to set those practices for you. I look forward to hearing your comments and answering some questions, but—for your own sakes—please avoid asking me anything about gardening.