SEC prices its crypto self-custody fallback at $433,833 a year per adviser

On Oct. 1 the SEC proposed a crypto custody framework under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, covering registered investment advisers, registered investment companies and business development companies.

Public comments remain open for 60 days after publication in the Federal Register; the SEC opened the changes for comment and has not adopted them as final rules.

According to Commissioner Hester Peirce, an adviser must first determine that no permitted custodian is available for a crypto asset before holding it, then repeat that assessment quarterly.

The CLARITY Act would have detailed the regulatory responsibilities of the Commodity Futures Trading Commission and the SEC regarding cryptocurrencies.

The custody proposal was submitted to the Office of Management and Budget on Aug. 25.

"More regulatory proposals are on the horizon, and I look forward to continuing to help President Trump cement the United States as the crypto capital of the world," Atkins said.

The SEC's Table 8 models certain annual costs of $433,833 per adviser using the self-custody option.

The SEC puts the average cost of the independent internal control report at $376,000, alongside $57,833 in recurring internal compliance work.

The SEC's economic analysis anticipates that smaller advisers may elect against self-custody, while larger advisers could have sufficient resources to meet the safeguards.

Fidelity and Schwab offer crypto custody options; Fidelity provides custody through Fidelity Digital Assets.

Atkins said custody providers may be unable to support a newly developed crypto asset for several months after its launch, a delay the framework is meant to address.

Josh Burton, director of Silver Regulatory Associates, called the rules the "culmination of years of work" and said custody has "long been the most challenging part of RIA compliance in crypto."

The SEC's Innovation Exemption establishes a 5-year sandbox to allow the trading of national stocks on decentralized exchanges and through liquidity providers.

Peirce, who is retiring from the agency, hoped the new proposal "foreshadows that a calm end to the regulatory roller coaster ride is imminent."

The accountant figure comes from an inflation-adjusted prior estimate in the Paperwork Reduction Act analysis, rounded to the nearest $1,000.

A shared cost weighs more heavily on a small pool of assets than a large one, if the burden stays constant.

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

Table 8 separately lists an initial internal compliance cost of $173,499; the internal estimate assumes 300 initial hours and 100 recurring annual hours at $578.33 an hour.

The cost subtotal leaves out some technology, software, hardware and associated systems and processes, which the SEC expects to be economically high.

If 823 advisers each incur the modeled $433,833 annual cost, the industry total is about $357 million a year, excluding technology costs.

The SEC expects many direct costs could be passed on to clients through fees or expenses.

The SEC warns that demand for people who can assess crypto controls could make accountant services harder to obtain, particularly for smaller advisers with less bargaining power.

The custody proposal reached OMB on Aug. 25, before the Senate's failure to pass the CLARITY Act, which October reports place in the prior month (September).

John Reed Stark, former chief of the SEC Office of Internet Enforcement, has argued the regulatory push exceeds the agency's authority, runs counter to over a decade of enforcement, and usurps Congress's authority.

An investor protection group said the proposal "subjects investors to the very high risk of loss the SEC exists to prevent."

The $376,000 independent internal control report is about 87% of the $433,833 annual per-adviser cost.

A self-custodying adviser's first-year modeled cost, initial compliance plus the annual subtotal, is about $607,332 before technology spending.

The CLARITY Act was possibly the last attempt by Republicans to pass a crypto market-structure law before Democrats potentially take back at least one chamber of Congress in November's midterm elections.