SEC Clears Path for Ripple and Coinbase to Become Crypto Custodians

Introduction: In a significant legal milestone for the cryptocurrency industry, the U.S. Securities and Exchange Commission (SEC) has paved the way for companies like Ripple and Coinbase to act as qualified custodians of digital assets. On September 30, 2025, the SEC’s Division of Investment Management issued a rare 'no-action letter' that effectively greenlights state-chartered trust companies to hold crypto assets on behalf of investment advisers and investment funds. This move clarifies a long-standing ambiguity in federal securities laws and could integrate crypto firms more deeply into the traditional financial system.

A Key Legal Breakthrough

For years, ambiguity in U.S. law made it unclear whether state-chartered trust companies could serve as 'qualified custodians' for cryptocurrencies. Under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, regulated investment advisers and funds must store client assets with certain approved custodians – typically banks or similar institutions. However, most crypto-focused trust companies are chartered at the state level and do not take deposits like traditional banks, so it was debatable if they met the legal definition of a 'bank' custodian. The situation effectively precluded many crypto firms from serving mainstream investors, even as some states created special trust charters for digital asset services.

The SEC’s no-action letter on Sept. 30 resolves this uncertainty by confirming that state-regulated trust firms can be treated as banks for custody purposes when it comes to digital assets. In practical terms, the SEC staff has stated it will not recommend enforcement action against advisers or funds that use a state-licensed trust company to safeguard crypto assets, as long as specific conditions are followed. This assurance came in response to a request from law firm Simpson Thacher & Bartlett, which sought clarity on behalf of financial institutions looking to invest or custody assets in crypto. According to Brian Daly, director of the SEC’s Division of Investment Management, the relief is an “interim step to a longer-term modernization of our custody requirements” that “unlocks a larger universe of crypto custody options” – albeit subject to important safeguards.

Ripple, Coinbase, and the New Crypto Custodians

The SEC’s guidance immediately opens doors for prominent crypto companies that already operate state-chartered trust institutions. Coinbase Custody Trust Company in New York, for example, manages over $90 billion in crypto assets, and BitGo Trust Company in South Dakota oversees around $64 billion – both under state banking supervision. Ripple, which acquired the New York-based Standard Custody & Trust Company in 2023, now also has a foothold to offer regulated custody services as part of its institutional business. Under the new policy, these firms and others (such as Gemini Trust Company or Paxos Trust in New York) could now serve as official custodians for hedge funds, exchange-traded funds (ETFs), and other investment vehicles that hold crypto.

Previously, even well-established crypto firms operating as state trust companies faced uncertainty and skepticism about their legal status in serving regulated clients. Many traditional financial institutions were reluctant to partner with or rely on crypto specialists for custody due to the unclear regulatory picture. The SEC’s no-action letter largely removes this doubt. By explicitly acknowledging state trust firms as qualified custodians (akin to national banks or broker-dealers) for digital assets, the Commission is inviting more participation by crypto-native players in mainstream finance. This development is expected to increase competition in the custody arena, where until now big traditional banks (like BNY Mellon or Fidelity) and a few federally chartered firms held an advantage.

The crypto industry has welcomed the clarity. Bloomberg ETF analyst James Seyffart applauded the decision, calling it a “textbook example of more clarity for the digital asset space” and noting that it’s exactly the sort of guidance the industry had spent years hoping to see. Likewise, many in the community believe that formally expanding the custodian pool will encourage greater institutional adoption of cryptocurrencies, as regulatory barriers continue to fall.

Strict Safeguards for Custody

While the SEC’s letter eases entry for new custodians, it also imposes stringent conditions to ensure investor assets remain safe. Crypto custody providers and the advisers who use them must adhere to a series of requirements designed to prevent loss or misuse of client assets:

• Due diligence: Advisers must conduct initial and annual reviews of the state trust company custodian. This includes confirming the firm is authorized by its state banking regulator to provide crypto asset custody and that it maintains robust internal policies and procedures. As part of this due diligence, the adviser should examine the custodian’s most recent audited financial statements (prepared according to GAAP accounting standards) and obtain an independent internal controls report (such as a SOC 1 or SOC 2 report from a public accountant).
• Custodial agreement terms: Client assets must be held under a written agreement that clearly segregates those crypto holdings from the custodian’s own balance sheet. The agreement must also prohibit the custodian from lending out or rehypothecating the digital assets without the client’s explicit consent.
• Risk disclosure: The investment adviser is required to disclose to its clients (or to a fund’s board of directors/trustees) the material risks of using a state-chartered trust company as a custodian for digital assets. In other words, investors must be made aware of any unique custodial risks in the crypto context.
• Best interest determination: The adviser must determine that using the particular trust company for custody is in the best interests of the client. For regulated funds, the fund’s board also needs to evaluate and approve that the custodian choice is in the shareholders’ best interest.

Reception and Future Outlook

Regulators and lawmakers have been split in their reactions to the SEC’s move. Crypto-friendly officials praise the added clarity. SEC Commissioner Hester Peirce, a long-time advocate for digital asset innovation, said the new guidance eliminates the “guessing game” that advisers faced when choosing how to custody crypto, ultimately benefiting investors. U.S. Senator Cynthia Lummis of Wyoming also commended the letter, noting that her state had pioneered recognizing digital asset custodians as far back as 2020 – an effort that a prior, more skeptical SEC had discouraged. Many see the no-action letter as emblematic of the SEC’s more accommodative stance toward crypto under its current leadership, which has been encouraging firms to bring digital asset business onshore to the U.S.

On the other hand, some officials find the maneuver troubling. Commissioner Caroline Crenshaw – currently the sole Democrat on the SEC’s panel – publicly criticized the staff letter for 'poking holes' in core investor protections. She argued that any expansion of who can serve as a custodian should be done through formal rule changes subject to public comment, rather than through an abrupt staff action. Crenshaw warned that letting state-chartered trusts bypass the rigorous federal chartering process (through the Office of the Comptroller of the Currency, which some crypto firms have pursued) could undermine uniform standards. In her view, deciding which institutions to trust with investor assets is 'a high-stakes and important question' that demands more deliberation.

Looking ahead, the SEC has indicated that a broader overhaul of custody regulations is in the works. The agency’s regulatory agenda for 2024 includes a proposal to modernize custody rules for investment advisers, likely integrating crypto assets into the framework more definitively. The conditions imposed in this no-action relief may preview what official rules could require of crypto custodians. For the time being, the SEC’s letter is a powerful signal: it validates a wider set of custodians and may encourage more firms to seek state trust licenses to meet the rising demand for regulated crypto services. While the relief could theoretically be reversed by a future SEC with a different outlook, industry experts believe that the genie is out of the bottle. The wall between traditional finance and crypto is being lowered, and the involvement of reputable firms like Ripple and Coinbase in safeguarding assets could further legitimize crypto in the eyes of institutional investors.

Further Reading and Resources

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Frequently Asked Questions

What is a “qualified custodian” for crypto assets?
A qualified custodian is a regulated financial institution (such as a bank or trust company) that is authorized to hold client assets under federal law. In the crypto context, this means an entity that meets strict regulatory and security standards to safely custody digital assets on behalf of investors, providing safeguards similar to those in traditional finance.

Why are Ripple and Coinbase now eligible to serve as qualified custodians?
Both Ripple and Coinbase operate state-chartered trust companies, which the SEC now recognizes as equivalent to banks for custody purposes. Recent SEC staff guidance clarified that investment advisers can treat state-regulated trust companies as qualified custodians for digital assets. In practical terms, Ripple’s and Coinbase’s trust company affiliates can legally hold and safeguard crypto assets for institutional clients under the same protections afforded to traditional custodians.

What is a state-chartered trust company, and why does it matter for crypto custody?
A state-chartered trust company is a financial institution licensed at the state level to offer fiduciary services, including holding assets in trust. Crypto firms have obtained trust company charters (for example, in jurisdictions like New York) to meet high regulatory standards for custody. This status subjects them to rigorous oversight and capital requirements, which is why being a trust company helps a crypto firm qualify as a custodian—regulators view them as safer counterparts to banks for holding investors’ assets.

How does the SEC’s guidance improve investor protection in crypto custody?
The SEC’s guidance requires qualified crypto custodians to follow robust investor protection measures. Assets must be segregated from the custodian’s own balance sheet, meaning client crypto holdings are kept separate and safe even if the firm encounters trouble. Custodians also undergo regular independent audits and internal control reviews, and they are generally prohibited from lending or rehypothecating (reusing) client assets without consent. These safeguards are designed to ensure that investors’ coins and tokens are secure and readily accessible.

Are more regulatory changes coming for crypto custody?
Possibly. The SEC’s current stance (via the no-action letter guidance) provides interim clarity by allowing state-trusted firms to act as custodians, but it is not a formal rule change. The Commission has signaled that it may update the official custody rules in the future to more explicitly address digital assets. For now, however, crypto companies that meet the qualified custodian criteria can serve clients under existing regulations, and the SEC is monitoring this space closely to determine if further regulation is needed as the industry evolves.