New SEC crypto rules threaten small advisers, but big firms win

The US Securities and Exchange Commission’s proposed crypto custody fallback could broaden investment choices while making them easier for larger advisers to offer.

The agency’s economic analysis says the expense of safeguarding assets and arranging independent oversight may lead smaller firms to decline to offer the service.

Approved on Oct. 1, the proposal would let advisers hold covered client crypto assets when an eligible custodian is unavailable, subject to safeguards. Table 8 models certain annual costs of $433,833 per adviser using that option.

That estimate includes an independent control report but leaves out some potentially significant technology costs.

For clients, the consequence could be that an asset might become available through an adviser with sufficient custody resources while remaining outside another adviser’s offering.

SEC Commissioner Hester Peirce distinguished adviser “self-custody” from investors holding their own assets. Here, an intermediary would hold clients' key materials, potentially including a non-controlling portion. Clients would still depend on that intermediary’s safeguards.

For ordinary advisory clients, the adviser amendments concern crypto assets that are funds or securities, while the relevant scope for regulated-fund accounts is securities or similar investments.

The largest modeled annual component is the independent internal control report. The SEC puts its average cost at $376,000, alongside $57,833 in recurring internal compliance work.

Table 8 combines those amounts and separately lists an initial internal compliance cost of $173,499, all in 2026 dollars.

The internal estimate assumes 300 initial hours and 100 recurring annual hours at $578.33 an hour. It covers information, communications, and an agreement between adviser and client to treat the asset as a financial asset under applicable state law.

The subtotal leaves out some technology, software, hardware, and associated systems and processes. The SEC expects those costs to be economically high. Recordkeeping and disclosure burdens also appear separately in other tables, so the subtotal cannot serve as a complete operating budget.

The accountant figure comes from an inflation-adjusted prior estimate in the Paperwork Reduction Act analysis, rounded to the nearest $1,000, reflecting the agency’s historical cost model. Report costs could vary with the assets, safeguarding systems, and expertise needed to check different networks.

The agency assumes approximately 823 advisers, or 5% of 16,442 registered advisers, would use self-custody for that burden calculation. It cautions that actual uptake may be lower.

The economic analysis explicitly anticipates that smaller advisers may elect against self-custody, while larger advisers could have sufficient resources to meet the safeguards. It also identifies ways to share some costs across a larger client base, multiple assets, or affiliated businesses.

That creates a plausible advantage without establishing a universal minimum firm size. An adviser with substantial overall assets may have only a small pool of covered crypto assets needing this fallback.

Conversely, an adviser with a focused crypto business may already have the expertise and infrastructure another firm would have to acquire.

A shared cost weighs more heavily on a small pool of assets than a large one, if the burden stays constant. Firms could allocate costs across their wider businesses rather than charge only clients using the fallback.

The SEC expects many direct costs could be passed on to clients through fees or expenses. More assets and more networks can require more complex controls and more specialized accountant work, increasing absolute costs. The potential benefit comes from spreading or reusing parts of the infrastructure.

Accountant pricing could work either way: the SEC warns that demand for people who can assess crypto controls could make services harder to obtain, particularly for smaller advisers with less bargaining power.

The proposed fallback would depend on the adviser having a written reasonable basis, after due inquiry, that no qualified custodian would maintain each asset.