The SEC regulatory tides are changing, and there is no place where this is more evident than in the volatile waters of the crypto industry. Since its inception, regulatory bodies have taken polarizing stances on crypto assets, and United States regulators and legislators alike are beginning to reverse course from their hostile “regulation-by-enforcement” approach to finally provide the crypto industry with the guidance and clarity it needs.

In January 2025, then Acting SEC Chairman Mark Uyeda explicitly acknowledged that “to date, the SEC has relied primarily on enforcement actions to regulate crypto” and that this reactive approach produced “confusion about what is legal.” In response, the SEC launched a cross-divisional Crypto Task Force to “develop a comprehensive and clear regulatory framework for crypto assets.” This marks a deliberate pivot toward rulemaking and guidance. 

However, even with a now pro-crypto administration and accommodative SEC leadership, there are many hurdles on the path to a workable regulatory framework due to the complex and technical nature of blockchain and digital assets. Chief among them, and also the main reason that established financial regulations cannot reliably be applied to the asset class, is that regulators have yet to systematically answer this simple question: “Are crypto assets securities?”

Security Status of Crypto Assets

Regulators are working toward clearer classification with SEC officials emphasizing that the same legal standards, primarily the Howey test, still govern crypto. Back in a 2024 speech, former SEC Enforcement Director Gurbir S. Grewal reiterated that every crypto token is analyzed under the familiar Howey framework. As Grewal explained, “In the decade since we brought our first crypto enforcement actions, our approach has been consistent, principled and tethered to the federal securities laws and legal precedent. After all, every lawyer here knows what the test is to determine whether a crypto asset was offered and sold as an ‘investment contract,’ and therefore a security: it’s the Howey test.”

Let’s take a deeper look at Howey. The cornerstone of securities classification is the 1946 Supreme Court case SEC v. Howey, which defines an “investment contract” as one where a person invests money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. SEC staff and courts apply this flexible Howey test to digital assets case by case. In practice, the SEC has noted that routine buy-and-sell transactions in decentralized, consumer-oriented tokens often lack the profit-or-effort sequence required by Howey. 

Regardless, many tokens continue to be treated as securities when their economics meet Howey’s points. But regulators also recognize that many crypto activities and assets may fall outside securities law jurisdiction and they are starting to provide clarity on those scenarios.

Beyond the Howey test, Commissioner Hester M. Peirce has proposed a four-part taxonomy framework for crypto: dividing assets into (1) those inherently meeting securities criteria; (2) tokens that are not themselves securities but are sold via investment contracts; (3) cryptocurrencies excluded by design (like pure collectibles or stablecoins); and (4) an “all others” category. This approach reflects industry calls for a rules-based taxonomy. While specifics are evolving, fund managers should note that regulatory lines will likely get clearer this year and next through a combination of new laws and SEC rulemaking and actions.

Speaking of SEC actions, not all crypto assets are treated as securities. In fact, Peirce recently summarized: “My short answer to the question – Are crypto assets securities? – is that most currently existing crypto assets in the market are not.” Interestingly, some recent SEC guidance and developments further prove that point, including:

• Stablecoins (dollar-backed coins): In April, the SEC stated that certain fiat-backed stablecoins (“Covered Stablecoins”) are not securities under Howey or Reves v. Ernst & Young. To qualify, they must be redeemable 1:1 for USD; be backed by low-risk, liquid reserves; be used only for payments or value transfer; and not provide yield, profit-sharing or voting rights.
• • Silver’s Take: Plain-vanilla stablecoins used solely for payments appear to be outside the SEC’s reach, though stablecoins with yield-bearing features or complex structures may still be scrutinized. It is also worth noting that the GENIUS Act of 2025 (Guiding and Establishing National Innovation for U.S. Stablecoins) was passed by the Senate and is now with the House of Representatives. This will likely provide further guidance as it relates to who will regulate stablecoin issuers and to what extent.

• Meme Coins: In February, the SEC suggested that meme coins lacking investment features (i.e., no profit expectations, dividends or control rights) are unlikely to be securities and are more akin to collectibles like trading cards.
  • Silver’s Take: The label “meme coin” alone isn’t dispositive. But where the coin is marketed for entertainment, rather than as an investment, the SEC is less likely to assert jurisdiction. However, these coins generally are still protected by anti-fraud laws and we could still see guidance or enforcement relating to investor protections in this category, even if it does not come out of the SEC.

• Protocol Staking on Proof-of-Stake (PoS) Networks: In May, the SEC issued a statement about staking crypto assets directly tied to the operation of a public, permission-less PoS network (“Covered Crypto Assets”), clarifying that staking these assets to participate in or maintain the network’s consensus mechanism generally does not, in itself, constitute the offer or sale of securities. Further, they state that the activities undertaken by third parties involved in the protocol staking process – including node operators, validators and custodians – are “administrative or ministerial in nature” rather than “entrepreneurial or managerial” and, as such, do not meet the criteria of the Howey test to treat such transactions as investment contracts.
  • Silver’s Take: This statement on protocol staking is not definitive or comprehensive, lacking guidance on liquid staking and other unique staking arrangements, but it provides crypto firms and fund managers engaged in (or interested in) staking Covered Crypto Assets like Ethereum and Solana with comfort that such activities and services will no longer be in the SEC’s crosshairs for enforcement.

• Mining on Proof-of-Work (PoW) Networks: In March, the SEC clarified that mining native assets on PoW blockchains (like Bitcoin) does not constitute an offer or sale of securities. Miners are rewarded by protocol rules, not by relying on others’ managerial efforts.
  • Silver’s Take: Participants in self-mining or pooled mining arrangements likely do not trigger securities regulation, so long as rewards flow directly through protocol mechanisms.

Custody of Crypto Assets

Another area where the SEC Crypto Task Force has endeavored to provide clarity for the digital asset industry is the topic of custody. Unlike the previous administration, which did not provide comprehensive guidance tailored to the asset class, the SEC Crypto Task Force has recognized the unique properties of crypto assets when it comes to custody and acknowledged that revisions to the existing regulatory framework will be required to accommodate them. The Custody Rule, formally known as Rule 206(4)-2 under the Investment Advisers Act of 1940, requires SEC-registered investment advisers to safeguard client assets with a qualified custodian such as a bank, broker-dealer or other financial institution that meets regulatory requirements. Advisers must maintain those assets in accounts clearly identified as client assets, provide clients with regular account statements and undergo surprise examinations to verify holdings.

Furthermore, the Custody Rule is a foundational investor protection regulation designed for traditional financial assets such as stocks, bonds and cash. It assumes a centralized financial system in which assets are held and cleared by regulated intermediaries with standard recordkeeping and account segregation practices. However, crypto assets challenge these assumptions at every level:

• Many digital assets lack a central clearinghouse.
• Ownership is recorded on a distributed ledger rather than in a broker’s internal records.
• Control over crypto assets often depends on private key access, not custodial account statements.
• Not all reputable crypto custodians (such as trust companies or cold storage providers) meet the technical definition of a qualified custodian under current rules.

This mismatch has created legal uncertainty for private fund managers seeking to integrate crypto into portfolios while complying with regulatory obligations. The Custody Rule does not clearly state whether or how it applies to digital assets that are not classified as securities or funds. Because the rule was written before the emergence of crypto, it leaves gaps in coverage and compliance risks.

Why the Custody Rule Needs Amendments

Amending the Custody Rule to explicitly address digital assets has become a regulatory priority. As Peirce and others have observed, applying the existing rule to crypto “by analogy” leads to confusion and uneven enforcement. There are three primary reasons the Rule may need to be modernized:

1. Ambiguity around non-security digital assets
   The current Rule only covers “client funds and securities” and the term “funds” is not defined. This leaves a regulatory blind spot for crypto assets that the SEC does not consider securities, such as Bitcoin, certain stablecoins and “utility” tokens. Advisers may still have custody of these assets, but without a clear requirement or standard for safekeeping them, investor protection is inconsistent.
2. Limited universe of qualified custodians
   Many crypto-native custody solutions, such as trust companies specializing in cold storage or on-chain multi-signature wallets, do not qualify as “qualified custodians” under the existing Rule, even if they maintain robust security protocols. Additionally, the SEC had formerly issued guidance discouraging broker-dealers that were “qualified custodians” from offering services to the crypto industry (described further in the “Withdrawal of the 2019 Joint Staff Statement” section below), limiting advisers’ options and forcing them to rely on less-than-ideal arrangements, or take on additional liability and risk by using self-custodial solutions.
3. Technology and operational gaps
   The Rule does not contemplate how distributed ledger technology changes the concept of custody. For example, is control over a private key “custody”? What if the key is held by a multi-party service or hardware device? Without updated definitions and clarity around these novel custody models, fund managers and their legal teams are left to interpret and apply analog-era requirements to digital realities.

Recognizing these concerns, the SEC Crypto Task Force has communicated that they intend to establish a rational, fit-for-purpose regulatory framework which would include tailored custody rules recognizing the diversity of crypto assets and allowing room for innovation, including potential revisions to accommodate self-custody and staking without triggering violations of the Custody Rule.

In addition to the positive rhetoric from SEC Commissioners Peirce and Uyeda, and Chair Atkins at the Crypto Task Force roundtable on custody of crypto assets, recent developments further reflect the shift toward clearer standards and a friendlier regulatory environment:

• Withdrawal of the Proposed Safeguarding Rule
• The SEC under Chair Gensler’s leadership had proposed a sweeping amendment to the Custody Rule in February 2023 known as the Safeguarding Rule. The proposal would have extended custody obligations beyond “funds and securities” to include all client assets, including cryptocurrencies and digital tokens, regardless of their classification. It also aimed to raise the standards for who qualifies as a custodian, requiring that custodians provide segregated account structures, regular disclosures and independent public audits of control environments. The Safeguarding Rule would have created difficulties for many fund managers, but was especially burdensome for the digital assets, and was met with pushback from industry participants. On June 12, the SEC withdrew the Safeguarding Rule (alongside 13 other rules proposed in 2022 and 2023), signaling their intention to revisit the topic of custody and create a framework that allows firms to embrace the innovation that digital assets could bring to the financial industry.

• Withdrawal of the 2019 Joint Staff Statement
  In May, the SEC and the Financial Industry Regulatory Authority (FINRA) formally withdrew the 2019 Joint Statement on broker-dealer custody of digital asset securities. That statement had provided a form of “no-action” relief for special-purpose broker-dealers (SPBD) to custody crypto under certain strict conditions, but generally discouraged broker-dealer firms from providing services for crypto assets and required them to obtain permission before offering such services, unlike products for traditional securities. This withdrawal signals the SEC’s intent to develop a more universal framework, likely through rulemaking rather than staff interpretation.

• Updated FAQs from the Division of Trading and Markets
  Also in May, the Division of Trading and Markets released updated FAQs addressing crypto asset custody by broker-dealers. The FAQs clarified that:
  • SPBD relief is no longer operative;
  • The possession and control requirements of Rule 15c3-3 are not implicated if a broker-dealer holds non-security crypto assets for customers. These requirements apply only to securities;
  • Crypto assets that are not securities are not Securities Investor Protection Act (SIPA)-protected; and
  • Broker-dealers engaged in digital asset activities must demonstrate compliance with capital, custody and operational rules regardless of asset type.

• Congressional Attention to Custody Issues
  Bipartisan stablecoin legislation advancing in both chambers of Congress (STABLE Act in the House and GENIUS Act in the Senate) includes explicit provisions on custody. These bills would require that entities offering custodial services for stablecoins meet stringent federal oversight criteria, including reserve backing, consumer disclosures and regulatory licensure. This legislative direction underscores a growing consensus that custody infrastructure is as important as classification when it comes to investor protection.

Conclusion: Moving Toward Tailored Crypto Regulation

If nothing else, the regulatory trajectory is moving from one-size-fits-all enforcement to targeted, “built-for-purpose” rules. Private fund managers must make informed, risk-aware custody decisions based on the best available guidance, with key recommendations being classify each digital asset in your portfolio; engage regulated custody providers wherever possible; document custody procedures and internal controls for each asset class; and closely monitor rulemaking developments.

Beyond these takeaways lies a deeper (and actually “simpler”) issue – the crypto industry simply does not fit neatly within the legacy regulatory infrastructure of traditional finance. Digital assets are not uniformly equity, debt or commodities: meaning, they challenge the definitions enshrined in decades-old statutes.

That is why a regulatory taxonomy framework is so critical. A well-structured taxonomy would segment digital assets based on their primary functions and risks – whether as payment tokens, utility tools, governance rights or investment vehicles – and assign appropriate oversight accordingly. This would enable the SEC, the Commodities Futures Trading Commission (CFTC), banking regulators, consumer protection agencies and others to coordinate rather than compete. Clear lines of authority would allow fund managers to comply without fear of duplicative enforcement or retroactive reinterpretation.

Additionally, built-for-purpose regulation, developed with input from developers, financial institutions, consumer advocates and others, can protect investors while allowing innovation. Such regulation must acknowledge that decentralization and open-source development are not inherently harmful, but require new forms of risk assessment and management. Additionally, qualified custody should focus on cryptographic security, not just third-party controls.

In conclusion, the SEC and other agencies are moving toward a more mature, transparent crypto regime. Uyeda’s statement that “the SEC can do better” than enforcement-only approaches set a path to an era of legal certainty ahead. The end state will likely be a clearer definition of which digital assets fall under which regulator, backed by a detailed taxonomy and specific laws for stablecoins, token exchanges, custodianship and more. Clearly, crypto is not traditional finance and it should not be regulated as if it were. A flexible, intelligent framework will benefit not just fund managers, but the entire financial ecosystem as digital innovation accelerates.