Five years after international law firm McDermott Will & Schulte assisted Wyoming trust company Two Ocean Trust in obtaining novel “no-action” relief from the Wyoming Division of Banking, the Securities and Exchange Commission (SEC) has officially adopted a similar position and declared that state-chartered trust companies are qualified custodians within the meaning of the Investment Company Act of 1940 (the 1940 Act) and the Investment Advisers Act of 1940 (the Advisers Act).

In July 2020, McDermott, together with Two Ocean Trust, sought and received novel “no-action” relief from the Wyoming Division of Banking, permitting Two Ocean Trust to act as a qualified custodian of cryptocurrency for investment advisers and investment companies. At the time, Two Ocean Trust was the first company to receive a letter issued by a state or federal regulator acknowledging a state-chartered trust company as an appropriate qualified custodian of digital assets.

Determining that state-chartered trust companies were eligible to custody digital assets for regulated entities was a major breakthrough for the digital asset industry. Traditional custodians, such as national and state banks, were not permitted or refused to custody digital assets. In the intervening years, state-chartered trust companies have become the primary custodial method for digital asset firms. The state of Wyoming, in particular, paved the way, having adopted a robust Digital Asset Custody framework in 2020 and strengthening bankruptcy protection for client funds held at trust companies in 2024.

Despite this, the SEC had never explicitly endorsed this determination. Instead, following Wyoming’s determination for Two Ocean Trust, the SEC issued a statement acknowledging the decision but advising that such decision did not reflect the views of the Commission (the 2020 Guidance). Since the 2020 Guidance, the SEC has not again commented on this issue, leaving a grey area on whether the SEC would take action against state-chartered trust companies acting as qualified custodians.

After nearly five years of uncertainty, the SEC has officially withdrawn the 2020 Guidance and explicitly confirmed that it would not recommend enforcement actions against state-chartered trust companies operating as qualified custodians.

In its No-Action Letter dated September 30, 2025, the SEC confirmed that a legal entity organized under state law that is (i) supervised and examined by a state authority having supervision over banks and (ii) permitted to exercise fiduciary powers under applicable state law is a qualified custodian for the purposes of the 1940 Act and the Advisers Act. Specifically, the SEC stated that regulated entity may use a state trust company that:

1.     Is “authorized by the relevant State Banking Authority to provide custody services”;

2.     “[M]aintains and implements written internal policies and procedures reasonably designed to safeguard Crypto Assets and Related Cash and/or Cash Equivalents from the risk of theft, loss, misuse, and misappropriation”;

3.     Provides audited financial statements;

4.     Provides a most “recent written internal control report prepared by an independent public accountant” (I.e., an SOC-1 or SOC-2 report) that confirms such internal controls are “suitable designed and are operating efficiently to meet control objects relating to custodial services”; and

5.     Enters into a written agreement with a regulated entity that provides the state trust company will not “directly or indirectly lend, pledge, hypothecate, or rehypothecate” any custodial funds and that such custodial funds will be segregated from state trust company assets.

Additionally, the regulated entity should disclose to its clients any “material risks associated with using State Trust Companies as custodians.” In issuing such letter, the SEC has broadly adopted the custodial standards promulgated in the Wyoming Digital Asset Custody framework.

McDermott is pleased to have played a role in the initial Wyoming determination that a state trust company may act as a qualified custodian and is proud to see the SEC confirm the same determination.

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