As private fund advisers increasingly incorporate digital assets into their portfolios, registered investment advisers (“RIAs”) managing hedge funds or private funds must align their compliance, valuation and custodial practices with evolving expectations from the SEC. For advisers to private funds, the presence of crypto or blockchain-based assets introduces additional layers of operational, valuation and oversight risk, making a proactive framework essential.
1) Custody & control
The Advisers Act Custody Rule (Rule 206(4)‑2) requires client funds and securities be maintained with a qualified custodian and, for private funds, covered by an annual audit within prescribed timelines. When crypto assets are involved, use of trading platforms that are not qualified custodians is a recurring enforcement focus.
In September 2024, the SEC settled charges against Galois Capital Management for custody‑rule failures involving crypto asset securities and for misleading redemption‑notice disclosures ($225,000 penalty)[1] [2].
Thus, advisers should evaluate their custody model; is the digital-asset provider a qualified custodian, can it deliver independent verification, segregated accounts, client statements? If not, does the adviser’s alternative (self-custody or crypto-native custody) meet equivalent protections?
2) Valuation & audit readiness
Digital‑asset prices can be fragmented and sensitive to forks, airdrops, staking rewards, and protocol events. Document pricing sources, stale‑price thresholds, and any model‑based inputs specify how staking yield, forks, and airdrops are treated in Net Asset Value (NAV). SAB 122 rescinded SAB 121’s safeguard‑liability approach, but auditors still expect persuasive evidence of existence and ownership (e.g., reconciliations to on‑chain activity and custodian statements) and clear change‑control around valuation models[3]. Ensure disclosures in Limited Partnership Agreement (LPAs)/sub docs, Form ADV (as applicable), and investor letters match practice. The adviser should maintain a policy-and-procedures framework specific to digital assets, integrate it with existing operations, and ensure internal controls are clear.
3) Compliance / governance & side-letter or redemption dynamics
When digital assets are part of the strategy, the adviser must consider how crypto-specific features might impact redemption rights, side-letter terms, investor communications and conflicts of interest. For example, if a fund stakes tokens and obtains yield, are those returns being properly allocated? Are preferential redemption or fee arrangements tied to digital-asset exposures?
The adviser must ensure that governance remains consistent: disclosures must reflect the digital-asset exposure; valuations and custody standards must be transparent; side-letter or preferential terms must be fully and equally disclosed to all investors. The fact that digital assets may move or transfer faster than traditional assets mean redemption/cash-flow and liquidity planning becomes even more important.
4) Practical steps for RIAs now
- Conduct a custody audit: Map all digital-asset holdings, providers, platforms, wallet structures, custody arrangements; assess whether the provider meets the “qualified custodian” safe-harbor or equivalent protections (segregation, independent verification, client statements).
- Review and update valuation policy: Document how digital assets are valued, market-based vs model-based, how staking/yield is treated, how forks or airdrops are handled, how governance risks are assessed.
- Update investor disclosures: Ensure the LPA, subscription documents and investor reports properly describe the nature of digital-asset exposures, including liquidity risk, custody risk, model risk and redemption risk.
- Strengthen controls and governance: Build internal policies for transfers, private-key management, wallet security, segregation of duties, incident response (e.g., lost keys, protocol failure), audit/compliance oversight.
- Monitor regulatory developments: While the SEC withdrew its proposed “Safeguarding Rule” in 2025, advisers must continue to monitor the agency’s evolving views on custody of digital assets.
- Ensure board or advisory-committee oversight: Digital-asset holdings should be explicitly addressed in the oversight forum of the fund (e.g., where valuations, redemption risk, side-letter exposure, custody arrangements are reviewed).
Bottom line
The 2025 policy shift (SAB 122; withdrawal of the safeguarding proposal) broadens potential custody pathways but does not diminish expectations under the Custody Rule, antifraud provisions, and books‑and‑records requirements. RIAs integrating digital assets into private‑fund strategies should operationalize custody verification, formalize valuation processes, lock down communications, and ensure disclosures accurately reflect practices meeting investor expectations and regulatory scrutiny. Chair Gensler’s 2024 statement approving spot Bitcoin ETPs underscores that such approvals do not signal broader leniency for other crypto assets or for compliance obligations.[4]
Jacko Law Group works with Private funds to identify and address gaps in compliance, valuation and custodial practices for digital and other asset types. For more information, please contact us at 619.298.2880.
Author: Steven Goldstein, Counsel, Jacko Law Group, PC (“JLG).
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks, and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com/.
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[1] SEC Press Release 2024‑111 ‘SEC Charges Crypto‑Focused Advisory Firm Galois Capital for Custody Failures’ (Sept. 3, 2024): https://www.sec.gov/newsroom/press-releases/2024-111.
[2] SEC Order Galois Capital Management LLC (IA‑6670) (Sept. 3, 2024): https://www.sec.gov/files/litigation/admin/2024/ia-6670.pdf
[3] SEC Staff Accounting Bulletin No. 122.
[4] Chair Gary Gensler — Statement on Approval of Spot Bitcoin ETPs (Jan. 10, 2024): https://www.sec.gov/newsroom/speeches-statements/gensler-statement-spot-bitcoin-011023
