**SEC Issues Crypto Custody Warning: Know the Risks Before You Store**
The US Securities and Exchange Commission (SEC) has issued a fresh guidance urging retail investors to understand the risks and options before storing digital assets, as federal regulators advance a historic shift toward integrating crypto into the traditional banking system.
The advisory comes amid a broader regulatory realignment that has seen the agency drop enforcement cases, approve tokenization pilots, and clear crypto firms for national bank charters. The SEC's Office of Investor Education and Assistance released an investor bulletin outlining the mechanics of crypto asset custody and the trade-offs between self-managed wallets and third-party custodians.
**Understanding Crypto Custody: Risks and Options**
The guidance defines custody as the method through which investors store and access private keys, the passcodes that authorize transactions and prove ownership of digital assets. It warns that losing a private key results in permanent loss of access, while compromised keys can lead to theft with no recourse.
Curious about crypto wallets and how to store and access crypto assets? Check out our Crypto Asset Custody Basics Investor Bulletin for more information.
**Hot Wallets, Cold Storage, and the Security Spectrum**
The bulletin distinguishes between hot wallets, which remain connected to the internet for convenience, and cold wallets, which use physical devices like USB drives or paper backups to stay offline. Hot wallets expose users to cyber threats but enable faster transactions, while cold wallets offer stronger protection against hacking at the cost of portability and ease of use.
The SEC notes that physical cold storage devices can be lost, damaged, or stolen, creating additional risks that may still result in permanent asset loss. Investors choosing self-custody control their own private keys and bear full responsibility for security, backup procedures, and technical setup.
**Regulatory Shift Accelerates as Crypto Enters the Banking System**
The custody guidance arrives as the SEC pivots from enforcement-led oversight to policy development under Chair Paul Atkins, who told Fox News in August that the agency is "mobilizing" to make the US the global crypto capital. Atkins said divisions across the SEC are now focused on building a regulatory framework that supports innovation while protecting investors, marking a sharp departure from the litigation-heavy approach that defined the previous administration.
That shift has already produced tangible results. The agency closed its multi-year investigation into Ondo Finance without charges this week, signaling greater tolerance for tokenized real-world assets. Days earlier, the SEC granted the Depository Trust and Clearing Corporation a rare no-action letter allowing it to tokenize US Treasuries, ETFs, and Russell 1000 components starting in late 2026.
**National Bank Charters and Tokenization**
The OCC conditionally approved five crypto firms, including Circle, Ripple, BitGo, Fidelity Digital Assets, and Paxos, to launch or convert into national trust banks. The charters allow digital-asset companies to custody assets and offer banking services under a single federal standard, eliminating the need to navigate state-by-state regulations.
Paxos received explicit permission to issue stablecoins under federal oversight, while Ripple's charter excludes RLUSD issuance through the bank. OCC head Jonathan Gould said the approvals ensure the federal banking system "keeps pace with the evolution of finance," dismissing concerns from traditional banks that the agency lacks supervisory capacity for crypto-native firms.
**Regulatory Momentum Extends Beyond Custody and Charters**
The Commodity Futures Trading Commission launched a pilot program allowing Bitcoin, Ether, and USDC as collateral in derivatives markets, while the OCC found that nine major US banks imposed "inappropriate" restrictions on lawful crypto businesses between 2020 and 2023.
Senate leaders are also racing to finalize the Responsible Financial Innovation Act before year-end, though unions and consumer groups warn the bill could expose pensions to unregulated assets. The Teachers' union AFT has called on Congress to kill the crypto market-structure bill, warning that it threatens pensions and 401(k)s.
As the regulatory landscape continues to evolve, investors are urged to stay informed about the risks and options available for storing digital assets. By understanding the mechanics of crypto custody and the trade-offs between self-managed wallets and third-party custodians, investors can make more informed decisions and protect their investments in the rapidly changing world of cryptocurrency.