Following the Senate's failure to pass the CLARITY Act, Securities and Exchange Commission (SEC) Chair Paul Atkins confirmed that the agency will independently press forward with administrative rulemaking to modernize U.S. digital asset oversight. 

The announcement accompanies a 760-page regulatory proposal aimed at overhauling custody rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. The move is designed to dismantle decades-old custodial barriers and keep crypto innovation onshore.

1. The Pro-Active Shift: 1940s Rules vs. 2020s Infrastructure

Chair Atkins emphasized that legacy custody frameworks—designed strictly for paper stock certificates and traditional financial instruments—no longer fit digital asset infrastructure.

The Core Issue: Under previous enforcement-heavy approaches, registered investment advisers (RIAs) and institutional funds faced significant regulatory friction when attempting to custody digital assets directly or partner with specialized custodians.

The Proposed Solution: The SEC's October proposal (File No. S7-2026-35) establishes formal custodial pathways for investment advisers and regulated funds, explicitly recognizing conditional self-custody and qualified state trust custodians.

The Goal: Eliminate regulatory ambiguity and prevent crypto capital and trading volume from moving to offshore jurisdictions.

2. A Strategic Triad: Modernizing Capital Markets

The custody proposal represents the third major administrative initiative rolled out by the SEC:

Modernized Crypto Custody Rules: Expanded qualified custodian definitions that accommodate native digital asset storage mechanisms.

Regulation Crypto Assets: Tailored disclosure regimes designed for digital asset offerings, creating a alternative to standard registration.

The Innovation Exemption: A 5-year conditional sandbox permitting decentralized exchanges (DEXs) and permissioned Automated Market Makers (AMMs) to facilitate trading for tokenized U.S. equities.

3. Pushback: Agency Authority vs. Legislative Mandates

The SEC's aggressive administrative push has drawn criticism from regulatory traditionalists.

This regulatory push exceeds the agency's authority, runs counter to over a decade of enforcement precedents, and usurps Congress's authority."

— John Reed Stark, former Chief of the SEC Office of Internet Enforcement

Critics contend that without broad statutory authority granted by Congress via legislation like the stalled CLARITY Act, major structural rule changes may face legal challenges under the Major Questions Doctrine.

Key Takeaway

By shifting from regulation by enforcement to administrative rule formulation, the SEC aims to establish the U.S. as a competitive jurisdiction for on-chain finance. With the proposal now subject to a 60-day public comment window, institutional advisers, funds, and token projects must prepare their compliance and operational strategies for an evolving regulatory landscape. 

Senate