SEC crypto custody shakeup fuels tokenization race

In August 2026, the SEC’s Division of Investment Management granted Franklin Templeton no-action relief permitting its registered funds to invest in the Franklin OnChain U.S. Government Money Fund (BENJI), a pioneering blockchain-recorded money market fund launched in 2021 with assets surpassing $1 billion by mid-2026. This relief marked a significant regulatory milestone by recognizing blockchain-based fund custody as functionally equivalent to traditional book-entry systems, provided that Franklin Templeton Investor Services LLC (FTIS) maintained stringent transfer-agent controls. These controls included managing separate wallets for each fund, sending confirmations, limiting transmission permissions, and supporting daily reconciliations with independent audits, thereby ensuring robust accountability and operational integrity.

The SEC’s no-action relief notably emphasized the primacy of a regulated and accountable transfer agent over mere private-key control, underscoring that the agency’s chief concern was the maintenance and correction of the official shareholder record rather than the underlying blockchain technology itself. FTIS’s role extended beyond custody to include administrative functions such as error correction, freezing, and migrating wallet records, ensuring continuity and reliability in shareholder recordkeeping. This approach effectively treated blockchain-integrated recordkeeping platforms as equivalent to traditional systems, signaling the SEC’s evolving stance on digital asset custody amid broader regulatory uncertainties.

Issued just days before the SEC delayed its anticipated 'innovation exemption' designed to ease regulatory hurdles for tokenized securities, the no-action letter served as an interim but crucial framework for custody practices involving blockchain-recorded fund shares. It provided valuable guidance on designing control frameworks around tokenized assets, reflecting the SEC’s cautious yet progressive approach to integrating digital asset infrastructure within existing transfer agency and custody regulations. This timing highlighted the SEC’s balancing act between fostering innovation and ensuring investor protection in a rapidly evolving digital asset landscape.

By mid-2026, institutions began tokenizing shares from major indices such as the Russell 1000, enabling 24/7 transfer of these tokenized securities through approved wallets. However, regulatory ambiguity persists regarding how the traditional 24/7 trading rules apply to this new paradigm, leaving market participants uncertain about compliance and enforcement. Concurrently, innovative custody solutions are emerging that promise near real-time management of crypto assets, signaling a potential transformation in how tokenized securities are safeguarded and transferred, even as political events like the upcoming midterms add layers of uncertainty to regulatory clarity.

Amid these technological advancements, the Blockchain Association has actively called on the SEC to rescind outdated regulations—specifically rules 611 and 610—that currently enable the Depository Trust & Clearing Corporation (DTCC) to maintain a near-monopoly over tokenized securities settlement. This industry push for regulatory modernization aims to level the playing field and foster competition, reflecting broader concerns that legacy frameworks are ill-suited for the decentralized and instantaneous nature of tokenized asset markets.

In August 2026, under Chair Paul Atkins, the SEC submitted a comprehensive proposal to the White House Office of Management and Budget aimed at modernizing and clarifying crypto custody rules for investment advisers and funds. This initiative seeks to update the regulatory framework by removing outdated provisions that no longer provide investor protection given the evolution of digital asset markets and trading practices, thereby aligning custody regulations more closely with current market realities.

The proposed overhaul represents a marked shift from the failed 2023 custody rule attempt under former Chair Gary Gensler, reflecting a more crypto-friendly regulatory environment fostered by Atkins. It aims to accommodate modern institutional custody technologies such as multi-signature wallets and multi-party computation, while expanding the pool of qualified custodians to include federally chartered trust banks that have proliferated in the crypto sector, thus addressing longstanding legal and operational risks tied to safeguarding private cryptographic keys.

Classified as a deregulatory effort under Executive Order 14192, the SEC's proposal intends to reduce unnecessary burdens rather than impose new restrictions, signaling a regulatory philosophy focused on facilitating institutional crypto adoption. Following the OMB review—which can last up to 90 days—the all-Republican SEC commission plans to vote on the rule and open it for at least 60 days of public comment, targeting a potential public release in October 2026, although delays remain possible given the absence of statutory deadlines.

This custody rule overhaul is part of a broader SEC strategy to transition from enforcement-driven oversight to clear, concrete regulations that foster innovation and investor protection in the digital asset space amid stalled congressional crypto legislation. By clarifying qualified custodianship and updating rules under both the Investment Advisers Act and Investment Company Act, the SEC aims to position the U.S. as a leader in digital asset market infrastructure, addressing complexities unique to blockchain-based ownership and control mechanisms.

As of August 2026, the SEC has taken a significant step by submitting its proposed crypto custody rule to the White House Office of Management and Budget, aiming for an October proposal date. This rule seeks to modernize the custody regulations under the Investment Advisers Act and Investment Company Act to explicitly include digital assets, addressing long-standing adviser and fund concerns about the applicability and clarity of existing custody requirements in the crypto context. While the draft remains undisclosed, this move signals a pivotal regulatory evolution that could unify and clarify custody standards for digital assets within established federal frameworks.

The forthcoming rulemaking promises to harmonize custody requirements for both registered investment advisers and investment companies, potentially reducing the current patchwork reliance on SEC staff no-action letters and informal relief. Notably, the SEC's September 2025 no-action relief allowing certain state-chartered trust companies to be treated as banks for crypto custody arrangements may be formalized and expanded under the new framework, offering clearer pathways for institutional adoption and compliance. This consolidation could significantly streamline operational controls and cybersecurity safeguards, although precise standards for wallets, private keys, and segregation remain to be detailed.

This new custody proposal marks a distinct departure from the SEC’s withdrawn 2023 Safeguarding Advisory Client Assets proposal, which faced criticism for overly stringent qualified custodian definitions that excluded most digital asset custodians. By leveraging its existing statutory authority, the SEC is advancing this targeted rule independently of broader crypto market legislation, reflecting a pragmatic approach to address pressing regulatory gaps without waiting for Congressional action. This shift underscores the SEC’s intent to craft a more tailored and feasible custody framework that better aligns with the unique technological and operational realities of blockchain-based assets.

The SEC’s revived push in August 2026 to modernize crypto custody rules marks a critical inflection point in regulatory oversight, as the agency attempts to reconcile digital assets with traditional custody frameworks that have long governed banks, transfer agents, and broker-dealers. This renewed focus, led by Chairman Paul Atkins, aims to clarify which platforms qualify as qualified custodians and how activities like staking and lending are treated, yet the absence of published rule text has left investment advisers in regulatory limbo, forcing them to reassess custodian relationships and delay tokenized product rollouts amid persistent uncertainty.

While the SEC’s modernization efforts promise to lower significant barriers for banks and investment firms holding client cryptocurrency—enabling institutional-grade research, on-chain analysis, and strategic investments in DeFi ecosystems—the regulatory lag contrasts sharply with the rapid advancement of market infrastructure and tokenization trends. This divergence creates a complex environment where protocols and tokenized assets outpace legal definitions, increasing demand for custodians capable of securely managing on-chain assets without exposing clients to single private key risks, even as compliance teams grapple with the evolving, yet still opaque, regulatory landscape.