In the first post on this topic, we provided a simple answer to a question posed by the Director of the SEC’s Division of Investment Management (the “Division”):

To the extent a fund plans to hold cryptocurrency directly, how would it satisfy the custody requirements of the 1940 Act and relevant rules?”

Our simple answer was to treat cryptocurrencies as “financial assets” under Article 8 of the Uniform Commercial Code. In the second post, we explained how this simple answer may be hard to implement when it comes to trading cryptocurrencies, because their markets require trades to settle in the next block. Thus, rather than a custodian implementing a portfolio manager’s instruction to settle a trade, a portfolio manager trading a cryptocurrency will normally need to have immediate control over the transfer of the cryptocurrency, which is inconsistent with the custody requirements of the Investment Company Act of 1940 (the “1940 Act”).

In this post, we consider three potential solutions to the dilemma faced by an investment company that must hold cryptocurrency in compliance with the custody requirements of the 1940 Act while allowing its adviser to trade the cryptocurrency.


Continue Reading Why Blockchain Custody Is So Difficult—Paths Forward?

In our previous post, we provided a simple answer to the following question posed by Director Dalia Blass of the SEC’s Division of Investment Management:

To the extent a fund plans to hold cryptocurrency directly, how would it satisfy the custody requirements of the 1940 Act and relevant rules?”

Our simple answer was to treat cryptocurrencies as “financial assets” under Article 8 of the Uniform Commercial Code. But, as Director Blass knows, this is not the end of the questions relating to custody. Her letter included additional questions, such as:

If the fund may take delivery of cryptocurrencies in settlement, what plans would it have in place to provide for the custody of the cryptocurrency?”

This question relates to a core operation of investment companies: trading.


Continue Reading Why Blockchain Custody Is So Difficult—A Hard Part

There are no easy answers, but there are simple answers.”—President Reagan

In a January 2018 letter to the ICI and SIFMA, Director Dalia Blass of the SEC’s Division of Investment Management posed the following question, among many others:

To the extent a fund plans to hold cryptocurrency directly, how would it satisfy the custody requirements of the 1940 Act and relevant rules?”

There is a simple answer to this: “Just like our custodian satisfies these requirements with respect to most other financial assets held in our securities account.” But structural differences between cryptocurrencies and more traditional financial assets may make this harder than it sounds.


Continue Reading Why Blockchain Custody Is So Difficult—The Simple Part