On August 25, 2025, the Securities and Exchange Commission submitted a proposed rule revision to the White House Office of Information and Regulatory Affairs. The filing, designated RIN 3235-AN46, carries two markers that demand attention: "economically significant" and "deregulatory." The first term triggers a mandatory cost-benefit analysis. The second term signals something unprecedented for an agency that spent the previous four years expanding its regulatory perimeter around digital assets.
The proposal targets the custody rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. The SEC's stated rationale: remove "investor protection burdens that are no longer necessary" from outdated provisions. This is not a technical adjustment. This is a directional reversal.
I have tracked SEC rulemaking cycles since the 2017 ICO boom, when I built a due diligence framework that cross-referenced blockchain explorer data against whitepaper promises. That experience taught me a simple principle: regulatory filings are the only audit trail that matters in Washington. The August 25 submission is the first verifiable entry in a new ledger. The question is whether the final entries will match the opening balance.
Context: The 2023 Proposal and Its Failure
To understand what changed, you must first understand what failed. In February 2023, under Chair Gary Gensler, the SEC proposed a custody rule that defined "qualified custodians" narrowly: state or federal chartered banks, trust companies, SEC-registered broker-dealers, and CFTC-registered futures commission merchants. The practical effect was to exclude most crypto-native custodians, including those operating with multi-party computation (MPC) technology and distributed validator technology (DVT).
The 2023 proposal drew opposition from three directions simultaneously. Financial institutions argued the definition was too restrictive. Crypto platforms argued it was technically uninformed. Federal agencies, including the CFTC, raised jurisdictional concerns. The proposal was withdrawn. The withdrawal was not a policy defeat; it was a political signal. The SEC's enforcement-first approach had reached its operational ceiling.
Fast forward to 2025. Paul Atkins chairs the SEC. The agency's posture has shifted from restriction to accommodation. The August 25 submission is the first concrete evidence of that shift in the custody domain. The proposal is scheduled for formal publication in October 2025, followed by a public comment period. The timeline is compressed. The stakes are not.
Core: What the Deregulatory Designation Actually Means
The "deregulatory" designation is not rhetorical. Under Executive Order 12866, it triggers a specific analytical framework. The SEC must demonstrate that the proposed rule reduces regulatory burden rather than increasing it. This inverts the burden of proof from the 2023 cycle. Previously, the SEC had to justify why stricter custody requirements were necessary. Now, the SEC must justify why existing requirements are excessive.
This inversion has three technical consequences that market participants should track.
First, the definition of "qualified custodian" is likely to expand. The 2023 proposal limited custody to traditional financial institutions. A deregulatory revision would logically broaden this to include entities meeting objective standards—capital requirements, audit compliance, cybersecurity protocols—rather than categorical institutional status. This opens the door for crypto-native custodians operating with MPC and HSM (hardware security module) architectures to achieve regulatory recognition.
Second, the rule revision will interact with RIN 3235-AN48, a separate SEC agenda item that clarifies broker-dealer compliance requirements for crypto assets. The two rules are designed to operate in tandem. The custody rule defines where assets can be held. The broker-dealer rule defines how they can be transacted. Together, they form the compliance infrastructure for institutional crypto participation.
Third, the tokenized securities exemption remains pending. This is the connective tissue. Custody is the prerequisite for tokenized securities issuance. If the custody rule expands the qualified custodian universe, the tokenized securities exemption gains operational meaning. Without custody reform, the exemption is theoretical. With it, the exemption becomes a market structure.
Based on my audit experience during the 2020 DeFi summer, when I reviewed Uniswap and Compound contracts line-by-line for reentrancy vulnerabilities, I can state with confidence: the technical community has been building toward this moment for five years. MPC wallets, DVT networks, and audited cold storage solutions have matured to institutional standards. The regulatory framework is now catching up to the technology. The question is whether the technology can withstand the scrutiny that institutional custody will bring.
Contrarian: The Deregulation Trap
The market narrative frames this as an unambiguous positive. I see a more complex picture. Deregulation in custody creates a two-tier system that may increase systemic risk rather than decrease it.
Here is the unreported angle: the 2023 proposal, despite its restrictiveness, established a uniform compliance baseline. Every qualified custodian had to meet the same institutional standards. A deregulatory revision that expands the custodian universe will inevitably create a spectrum of compliance quality. The largest traditional custodians will maintain bank-level standards. Newer crypto-native entrants may meet the letter of the rule while lacking the operational depth of established institutions.
The 2022 bear market taught me a lesson about liquidity that applies directly here. I tracked stablecoin outflows from centralized exchanges using on-chain analytics during the FTX collapse. The pattern was consistent: institutions fled to the most regulated venues first. The same dynamic will apply to custody. The rule revision will not equalize the market. It will segment it. Sophisticated investors will demand the highest compliance tier. Retail investors, lacking the analytical tools to differentiate, may end up with lower-tier custodians.
There is also a legal risk that the market is not pricing. Consumer protection groups have already signaled interest in challenging deregulatory actions that weaken investor safeguards. The 2023 proposal was withdrawn under pressure from industry. A 2025 proposal that goes too far in the opposite direction could face litigation from the other flank. The SEC is now navigating between two opposing legal challenges. The optimal outcome is a middle path that expands the custodian universe while maintaining rigorous standards. The risk is that political pressure pushes the rule too far in either direction.
The Institutional Shift
The broader context is the wave of federal trust bank charters approved in recent months. These charters expand the pool of entities eligible to provide custody services. The SEC's rule revision is, in part, a response to this market-driven development. The agency is adjusting its framework to match the institutional reality that has already formed.
This is the pattern I have observed across multiple regulatory cycles: the market moves first, the regulators follow, and the gap between the two determines the risk profile. In 2017, the gap was wide and the consequences were severe. In 2025, the gap is narrower. The custody infrastructure has matured. The regulatory framework is being aligned to match it. The remaining risk is not in the technology. It is in the transition period.
Takeaway: The Audit Trail Must Remain Unbroken
The October formal proposal will be the first test. The public comment period will be the second. The final rule will be the third. Each stage will reveal the SEC's actual position versus its stated position.
Code is law only if the audit trail is unbroken. The same principle applies to regulation. The August 25 submission is the first entry in a new audit trail. The question is whether the final rule will maintain the integrity of that trail or whether political pressure will corrupt the record.
For market participants, the actionable signal is not the rule itself but the compliance infrastructure that will emerge around it. Custody-as-a-service models will proliferate. Traditional banks will enter the crypto custody market. Crypto-native custodians will seek regulatory recognition. The winners will be those who treat compliance as a technical requirement, not a marketing differentiator.
The ledger keeps score. The SEC has made its first entry. The next entries will determine whether this is a genuine reform or another chapter in the ongoing negotiation between innovation and regulation. Watch the October proposal. Read the specific language. Verify the standards. The market will price the direction. The details will determine the outcome.