The Wyoming Division of Banking issued a No-Action Letter (NAL) in October 2020 in response to a request from a Wyoming-chartered public trust company seeking the Division of Banking’s position on the ability of the company to custody digital assets as well as hold itself out as a “qualified custodian.” The NAL prompted the Staff of the Securities and Exchange Commission to issue a public statement seeking public comment on matters concerning the definition of “qualified custodian” under the Investment Advisers Act of 1940 (the “Advisers Act”) and Rule 206(4)-2 thereunder (the “Custody Rule”).

As a leader in creating a comprehensive digital asset regulatory environment, Wyoming has extended the longstanding authority of chartered trust companies to provide custodial services for customer assets to include digital assets. The following statement is significant coming from a state banking regulator: “As a legal matter, the [Wyoming Division of Banking] views digital assets in the same light as traditional asset classes, and therefore Wyoming trust companies may properly provide custodial services for virtual currency, digital securities and digital consumer assets.” The Division emphasizes that its position is based on the state having adopted comprehensive digital asset regulations which act “as a key prerequisite for banks and trust companies to operate safely in the digital asset space.”

While the Wyoming Division of Banking concluded that the company requesting the NAL may provide digital asset custody services, it clarified that the analysis requires consideration of both state and federal laws. Digital assets exist in a highly complex environment, where certain features can lead such assets to be considered commodities subject to regulation by the CFTC or securities subject to regulation by the SEC, among a host of other legal considerations.

In addition to acknowledging the permissibility of the Wyoming-chartered public trust to custody digital assets, and what prompted rise to the SEC’s public statement, the Wyoming Division of Banking also issued an opinion on whether the company requesting the NAL may hold itself out to the public and serve as a “qualified custodian.” The NAL contains a detailed analysis of the state and federal regulatory environment for custodial services, specifically noting that “[t]he law governing custodial services of both banks and trust companies, in the context of both traditional and digital assets, is not fully developed.”

The Wyoming Department of Banking carefully considers a variety of factors to support its conclusion that the company requesting the NAL falls within the expanded definition of “bank” in the Advisers Act. There are five separate factors that are analyzed to come to this conclusion, one of which includes the requirement that the trust company must not be operating for the purposes of evading securities laws. As arguably one of the state banking regulators most prepared to supervise digital asset activities, the Wyoming Division of Banking succinctly states that “Wyoming’s legal and supervisory framework for both digital assets and trust companies would make it a poor choice [for attempting to evade federal securities laws].”

The Wyoming Division of Banking confirmed that it will not recommend an investigation or enforcement action to the SEC on the issues addressed in the NAL. Of course, as specifically stated in the NAL, the SEC retains its own authority to determine whether a company meets the definition of “qualified custodian.”

In response to the NAL, the Staff of the SEC’s Division of Investment Management (IM), in consultation with the SEC’s FinHub staff, issued a broad public statement that reads more like a request for comment than an affirmative pronouncement on the specific fact pattern. IM has been very deliberative in its approach to digital assets, as has the SEC staff generally, and IM previously sought comment on digital asset custody issues in 2018 and 2019.

The SEC’s public statement requests comments on four broad topics:

• Do state chartered trust companies possess characteristics similar to those of the types of financial institutions the SEC identified as qualified custodians? If yes, to what extent?
• In what ways are custodial services that are provided by state chartered trust companies equivalent to those provided by banks, broker-dealers, and future commission merchants? In what ways do they differ? Would there be any gaps in–or enhancements to–protection of advisory client assets as a result of a state chartered trust company serving as qualified custodian of digital assets or other types of client assets?
• How do advisers assess whether an entity offering custodial services satisfies the definition of qualified custodian in the Custody Rule? What qualities does an adviser seek when entrusting a client’s assets to a particular custodian? Do the qualities vary by asset class? That is, are there qualities that would be important for safeguarding digital assets that might not be important for safeguarding other types of assets? If so, what qualities and why? Should the rule prescribe different qualities based on asset class, or should the rule take a more principles-based approach and allow advisers to exercise care in selecting a custodian?
• Are there entities that currently satisfy the definition of qualified custodian under the Custody Rule that should not be included within that definition because they do not meet the policy goals of the rule? If so, which ones and why? Conversely, are there entities that currently do not satisfy the definition of qualified custodian but should? If so, which ones and why?

Companies that are impacted in any way should strongly consider submitting a response to the SEC, and may do so anonymously via counsel or a trade association if they prefer not to identify themselves. We expect the agency will take any submissions into consideration as it continues to work on developing a comprehensive, potentially principles-based, approach to digital asset regulation.