SEC Issues Warning on Crypto Custody: Understand the Risks Before Storing

The U.S. Securities and Exchange Commission (SEC) has released new guidance advising retail investors to thoroughly understand the risks and options available when storing their digital assets. This warning comes at a pivotal time as federal regulators move towards integrating cryptocurrency into traditional banking systems.

Key Takeaways

The SEC urges investors to be aware of the risks associated with storing digital assets.
Investors can choose between self-managed wallets or third-party custodians for asset custody.
Hot wallets (online) increase transaction speed but pose cyber risks, while cold storage (offline) offers security but may lack convenience.
The regulatory landscape for crypto is evolving, with a focus on creating frameworks that support innovation without sacrificing investor protection.

SEC Issues Crypto Custody Warning: Know the Risks Before You Store

This advisory fits into a larger regulatory shift where the SEC has relaxed its enforcement actions, approved tokenization experiments, and granted permissions for crypto companies to obtain national bank charters.

Understanding Crypto Asset Custody

The SEC's Office of Investor Education and Assistance explains the concept of custody in their latest investor bulletin. Custody involves how investors store and access private keys, which are essential passcodes for authorizing transactions and verifying ownership of digital assets.

The bulletin highlights that losing a private key means permanently losing access to the associated assets. Moreover, if a private key is compromised, it can lead to theft for which there may be no recourse.

Hot Wallets vs. Cold Storage: The Security Spectrum

The bulletin differentiates between two main types of wallets. Hot wallets are connected to the internet, offering convenience and quicker transactions but also exposing users to various cyber threats. Cold wallets, on the other hand, use devices like USB drives or even printed backups, keeping assets offline for better protection against hacking. However, cold storage may be less portable and more challenging to use.

It's also important to note that cold storage devices can be lost, damaged, or stolen, posing additional risks that might result in the permanent loss of assets.

Investors who choose self-custody take responsibility for their private keys and must manage their security, backup protocols, and technical setups. Those opting for third-party custodians need to carefully evaluate how these providers secure assets, whether they use hot or cold storage options, and if they engage in activities like rehypothecation or asset commingling.

The bulletin encourages investors to verify whether custodians offer insurance, how they address bankruptcy or security breaches, and what transaction fees apply.

Regulatory Changes as Crypto Integrates into Banking

This guidance arrives as the SEC shifts from a strict enforcement model to a framework focused on policy development under Chair Paul Atkins. In an August interview with Fox News, Atkins emphasized the commission's efforts to position the U.S. as a global leader in cryptocurrency.

Atkins indicated that various divisions within the SEC are now dedicated to creating regulatory guidelines that foster innovation while safeguarding investors, which is a notable change from the litigation-heavy tactics of the previous administration.

These changes have already been reflected in recent actions. The SEC concluded a lengthy investigation into Ondo Finance without pursuing charges, indicating a new openness to tokenized real-world assets. Just days prior, the SEC provided a rare no-action letter to the Depository Trust and Clearing Corporation, permitting it to tokenize U.S. Treasuries, ETFs, and Russell 1000 components beginning in late 2026.

According to the DTCC, tokenized securities will maintain the same rights and protections for investors as traditional assets, effectively connecting existing infrastructure to blockchain-based settlement systems.

In addition, the Office of the Comptroller of the Currency (OCC) has conditionally authorized five crypto firms, including Circle, Ripple, BitGo, Fidelity Digital Assets, and Paxos, to establish or transition into national trust banks. These charters will enable these digital asset companies to safely custody assets and provide banking services under one federal standard, removing the complications of navigating state-level regulations.

Paxos gained special permission to issue stablecoins under federal oversight, while Ripple’s charter restricts RLUSD issuance from the bank.

Jonathan Gould, head of the OCC, stated that these approvals ensure the federal banking system evolves alongside financial innovation, downplaying concerns from traditional banks about the agency's ability to effectively supervise crypto-focused entities.

The momentum for regulatory reform isn’t limited to custody and charters. The Commodity Futures Trading Commission has initiated a pilot program that allows Bitcoin, Ether, and USDC to be used as collateral in derivatives markets. Meanwhile, the OCC reported that nine significant U.S. banks imposed “inappropriate” restrictions on lawful crypto businesses from 2020 to 2023.

Senate leaders are also racing to finalize the Responsible Financial Innovation Act by the end of the year, although unions and consumer groups caution that the legislation may expose pensions to risks associated with unregulated assets.