SEC Educates Retail Investors on Holding Crypto as Custody Decisions Become Market-Critical

The SEC is educating retail crypto investors on how the storage of digital assets can determine whether holdings survive hacks, bankruptcies, or shutdowns, while urging closer scrutiny of custodians and stronger personal security as crypto risks persist.

SEC Lays out How Investors Can Hold Crypto While Managing Custody and Security Exposure

The U.S. Securities and Exchange Commission (SEC) issued an Investor Bulletin on Dec. 12 through its Office of Investor Education and Assistance to “help educate retail investors about the ways investors can hold crypto assets.”

A key focus of the bulletin is the SEC’s advice on selecting third-party custodians such as crypto exchanges and specialized crypto asset custody providers. The guidance urges retail investors to carefully research any custodian before depositing crypto assets, including reviewing the firm’s background, regulatory status, and any history of customer complaints. Investors are advised to confirm which crypto assets a custodian supports, since offerings can vary significantly.

The SEC also stresses the importance of understanding what happens if a custodian is hacked, shuts down, or enters bankruptcy, and whether any insurance coverage applies to losses. The bulletin explains that investors should ask how and where custodians store private keys, whether they rely on hot wallets, cold wallets, or a combination, and whether storage is handled internally or subcontracted. It further warns that some custodians may lend customer crypto assets or commingle them for operational efficiency, practices that can increase risk if investors do not fully understand or consent to them.

Read more: SEC Chair Outlines Project Crypto Priorities on Token Rules and Governance

The bulletin also outlines general tips for protecting crypto assets regardless of custody arrangement. It emphasizes that investors should never share private keys or seed phrases and should store recovery information in a secure location.

The guidance advises keeping the amount and types of crypto assets owned private, noting that public disclosure can attract criminals. It highlights the ongoing risk of phishing scams designed to steal credentials or recovery phrases and encourages investors to remain cautious when receiving unsolicited messages or links. Strong passwords and multi-factor authentication are recommended for all online crypto accounts. The SEC guidance underscores that diligent custodian selection, combined with consistent personal security practices, plays a critical role in reducing the risk of permanent loss for retail investors engaging with crypto markets.

FAQ ⏰

• What is the SEC warning crypto investors about?

The SEC warns that poor custodian selection and weak security practices can lead to permanent crypto losses.

• Why does the SEC stress researching crypto custodians?

The SEC says custodians differ in asset support, risk practices, and protections during hacks or bankruptcy.

• What custody risks does the SEC highlight?

The bulletin flags risks from commingling assets, lending customer crypto, and unclear private key storage.

• What security steps does the SEC recommend for crypto holders?

The SEC urges protecting private keys, avoiding phishing, using strong passwords, and enabling multi-factor authentication.