On October 13, 2026, the Commodity Futures Trading Commission (the “CFTC”) issued an advance notice of contemplated rulemaking outlining two related initiatives concerning retail crypto asset transactions under Section 2(c)(2)(D) of the Commodity Exchange Act (the “CEA”). The first, referred to as Regulation CTX, sets out the CFTC’s preliminary interpretations of when crypto asset transactions are offered on a leveraged, margined or financed basis and when those transactions result in “actual delivery.” The second, referred to as Regulation CAM, describes a contemplated regulatory framework for trading venues and intermediaries handling covered transactions. If ultimately adopted substantially as contemplated, the initiatives could expand the circumstances in which crypto asset transactions are subject to federal commodities regulation and create a new regulatory pathway for crypto asset trading platforms seeking to operate under CFTC supervision. Background A Section 2(c)(2)(D) transaction is any transaction in a commodity that is both “(I) entered into with, or offered to (even if not entered with), a person that is not an eligible contract participant or eligible commercial entity" and "(II) entered into with, or offered to (even if not entered with), on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis.”  Unless an exception applies, Section 2(c)(2)(D) subjects such transactions to specified provisions of the CEA as if they were futures contracts and generally requires them to be conducted on or subject to the rules of a CFTC-regulated exchange. The CFTC contends that uncertainty surrounding the application of Section 2(c)(2)(D) to digital assets has impeded the migration of crypto trading activity to federally regulated markets.  According to the CFTC, retail market participants have instead relied primarily on state-level regulatory frameworks that were developed for money transmission activities rather than for trading markets.  The CFTC’s proposal seeks to replace that fragmented approach with a federal framework focused on market integrity, customer protection, transparency and risk management. Regulation CTX Regulation CTX, as described in the advance notice, contemplates a new comprehensive interpretation of how Section 2(c)(2)(D) applies to crypto asset transactions, following the CFTC’s withdrawal in 2025 of its prior interpretive guidance concerning actual delivery of digital assets. The advance notice focuses principally on two threshold issues: (a) when a transaction is deemed to be offered on a leveraged, margined or financed basis, and (b) when a crypto asset transaction is deemed to result in "actual delivery" sufficient to fall outside Section 2(c)(2)(D).  The advance notice reflects the CFTC's view that a broad range of crypto asset transactions currently conducted on spot trading platforms may fall within the scope of Section 2(c)(2)(D) and therefore may be subject to a federal regulatory framework comparable to that applicable to futures transactions. Broad Interpretation of "Offer" Perhaps the most consequential aspect of Regulation CTX is the CFTC's contemplated interpretation of what constitutes an "offer" of leverage, margin or financing. The CFTC preliminarily concludes that a transaction may become subject to Section 2(c)(2)(D) not only when leverage is actually utilized, but whenever a retail customer is offered the ability to obtain leverage, margin or financing, regardless of whether the customer ultimately elects to transact on a fully paid basis.  Thus, a covered offer may arise through a variety of customer-facing arrangements, including account opening documentation, exchange terms and conditions, margin agreements, financing programs and similar contractual arrangements that make leverage available to customers. The CFTC also suggests that financing arrangements offered through affiliated or coordinated third parties could trigger Section 2(c)(2)(D) treatment.  The CFTC also preliminarily concludes that financing offered by a third party may constitute a covered offer where the arrangement is facilitated, arranged, endorsed or materially assisted by the offeror or counterparty, including through marketing, influence over financing terms, revenue-sharing arrangements or integration with the offeror’s platform. Interpretation of the Actual Delivery Exception The advance notice also addresses the scope of the "actual delivery" exception in the context of in the application of Section 2(c)(2)(D) to digital assets.  The “actual delivery” exception excludes from Section 2(c)(2)(D) certain contracts that result in actual delivery and reflects typical cash market activity rather than the economic substance of an open futures contract.  In short, it reflects Congress’s intent not to interfere in the spot markets.  In the advance notice, the CFTC preliminarily concludes that actual delivery requires the customer to obtain a meaningful degree of possession or control over the purchased crypto asset. Depending on the asset and transaction, a meaningful degree of possession or control may require the customer to possess the credentials, such as private keys, associated with the relevant wallet address or account. Where an asset carries governance, staking or similar rights, the CFTC suggests that meaningful possession and control may also require the customer to exercise those rights directly and without material intermediary restrictions.  Under the CFTC’s preliminary interpretation, a fully paid, open CTX that remains reflected only through an exchange’s internal book-entry system would generally remain subject to Section 2(c)(2)(D) until actual delivery or another statutory exception applies. Continued Regulation of Fully Paid Positions The CFTC also takes the preliminary position that a fully paid crypto asset transaction may remain subject to Section 2(c)(2)(D) until actual delivery occurs. As a result, crypto assets held through an exchange's custodial or book-entry system, rather than transferred to a customer-controlled wallet, could remain within the scope of the CFTC's regulatory authority notwithstanding that the customer has paid the full purchase price.  Conversely, the CFTC acknowledges that many transactions executed through on-chain protocols may naturally satisfy the actual-delivery requirement because settlement occurs directly to customer-controlled wallets and results in the customer obtaining meaningful possession and control of the acquired assets.  Taken together, the contemplated interpretations of “offer,” “actual delivery” and fully paid positions would significantly broaden the circumstances in which crypto asset transactions may become subject to CFTC regulation. Regulation CAM Regulation CAM, as described in the advance notice, contemplates a new federal regulatory framework for crypto asset trading venues that offer transactions subject to Section 2(c)(2)(D). Rather than requiring digital asset platforms to fit within regulatory structures developed for traditional futures markets, the advance notice would create a specialized subset of designated contract market registration designed specifically for crypto asset transactions while preserving core principles relating to customer protection, financial integrity, market surveillance and risk management. Creation of a New Crypto Asset Market Registration Category Under the advance notice, a registered "Crypto Asset Market" ("CAM") would operate as a specialized form of designated contract market subject to modified regulatory requirements intended to accommodate the commercial realities of digital asset trading. The CFTC contemplates a framework that would permit, among other things, continuous 24-hour trading, integration of blockchain technologies into trading and market infrastructure, crypto-specific disclosure and surveillance requirements, specialized custody and operational standards, and the use of technology-enabled compliance controls. In developing the CAM framework, the CFTC repeatedly emphasizes the need to balance innovation and technological flexibility with traditional regulatory objectives such as customer protection, market transparency, prevention of manipulation and operational resilience. As currently contemplated, CTXs conducted on a CAM would be intermediated by an FCM and cleared and settled through a DCO, although the CAM, futures commission merchant (FCM) and derivatives clearing organization (DCO) functions could be performed by affiliated entities or, subject to appropriate registrations and safeguards, combined within a single integrated organization. Acceptance of Vertically Integrated Market Structures A particularly significant aspect of the advance notice is the CFTC’s willingness to accommodate vertically integrated business models that are commonly used in digital asset markets. Unlike traditional market structures that often separate trading, brokerage, custody and clearing functions among different regulated entities, the advance notice contemplates that a CAM could itself register as, or be affiliated with, a FCM and/or a DCO. Specialized Margin and Financing Framework The advance notice also would establish a framework for retail leveraged crypto asset transactions. Under the contemplated regime, retail customers would be permitted to obtain financing through arrangements administered by registered FCMs or qualifying banking institutions sponsored by FCMs. Those financing arrangements would serve as the basis for leveraged crypto asset transactions conducted on a CAM. Recognizing the volatility and operational characteristics of digital asset markets, the CFTC is considering a tailored margin regime rather than simply importing existing futures margin requirements. Among the subjects specifically identified for comment are continuously monitored margin systems, automated liquidation mechanisms, smart-contract-based risk management tools, standards governing acceptable collateral and rules addressing the treatment of customer assets securing financing arrangements. Custody, Customer Protection and Insolvency Issues The advance notice likewise devotes substantial attention to customer asset protection and raises numerous questions regarding how customer assets should be safeguarded within the CAM structure. In particular, the CFTC requests comment regarding customer asset segregation, rehypothecation practices, proof-of-reserves frameworks, custody arrangements, insolvency protections and the treatment of customer assets in the event of an intermediary bankruptcy.  The advance notice reflects the CFTC’s willingness to consider significant modifications to existing regulatory requirements governing exchange, brokerage, custody and clearing functions where necessary to accommodate the technological and operational characteristics of crypto asset markets, while preserving customer-protection, risk-management and market-integrity objectives. Sullivan Observations Convergence of Traditional and Digital Asset Market Infrastructure. The advance notice does not simply seek to regulate existing crypto trading activity.  Rather, it adapts core concepts of the CEA to digital asset markets, including exchange regulation, intermediary oversight, customer protections, clearing and margin requirements.  As a result, the advance notice may lower regulatory barriers for traditional financial institutions that have been reluctant to participate in digital asset markets while simultaneously imposing a more institutional regulatory framework on existing crypto market participants.   Expansion of CFTC Jurisdiction and Reorientation of Market Structure Regulation. Although framed as an interpretive and rulemaking initiative, the advance notice would significantly expand the practical reach of the CFTC's authority over crypto asset markets. The contemplated interpretations of "offer" and "actual delivery" would subject many transactions that market participants have historically viewed as spot transactions to a federal regulatory framework under Section 2(c)(2)(D). More broadly, the advance notice reflects the CFTC’s view that covered trading activity should operate within a uniform federal market-structure regime, rather than remain principally dependent on state money-transmission and crypto-asset licensing frameworks. The precise extent to which federal regulation would displace particular state-law requirements, however, remains to be developed.   Part of a Broader SEC-CFTC Digital Asset Regulatory Framework. The advance notice should not be viewed in isolation. Throughout the release, the CFTC repeatedly situates Regulation CTX and Regulation CAM within a broader federal effort, undertaken jointly with the SEC, to establish a comprehensive regulatory framework for digital asset markets. The advance notice builds on the agencies' March 2026 Joint Crypto Asset Taxonomy, the SEC-CFTC memorandum of understanding regarding digital asset regulation, and the SEC's contemplated Regulation Crypto Assets (91 Fed. Reg. 54510, August 21, 2026) all of which are intended to provide greater clarity regarding the regulatory treatment of crypto assets and secondary market trading. The advance notice also reflects an increasingly consistent regulatory focus on customer asset protection and custody arrangements. While operating under different statutory frameworks, the SEC and the CFTC are examining issues such as custody, customer asset segregation, intermediary insolvency, and the safeguarding of digital assets held for customers. (See Sullivan Client Alert SEC Proposes New Crypto Custody Framework for Registered Investment Advisers and Regulated Funds.)  Market participants should expect continued regulatory scrutiny of trading, custody, financing and clearing arrangements, particularly where a single platform performs multiple functions within the digital asset ecosystem.   Potential Impact on Existing Market Structures. The advance notice may require digital asset exchanges, custodians, lenders, broker-dealers and other market participants to reevaluate custody arrangements, wallet structures, financing programs, customer onboarding documentation and affiliated business models. Platforms that offer margin or financing features may find that transactions historically viewed as spot transactions become subject to CFTC regulation unless actual delivery occurs, while integrated trading, custody and financing arrangements may face increased regulatory scrutiny. What Comes Next Public comment of the advance notice closes December 14, 2026.  As the advance notice does not contain contemplated regulatory text and leaves many central elements of both initiatives open for comment, the CFTC would need to undertake additional notice-and-comment rulemaking before adopting binding Regulation CTX or Regulation CAM requirements. For More Information This Client Alert has been prepared by John Hunt, a Partner in the Investment Management practice group, and Natalie Lederman, a Partner in and Leader of the Fintech & Blockchain practice group, of the international law firm of Sullivan & Worcester LLP.  For more information, Mr. Hunt may be reached in our Boston office by calling +1 (617) 338-2961 or our London office by calling +44 (0)20 7448 1000, or by email at jhunt@sullivanlaw.com. Ms. Lederman may be reached in our New York office by calling +1 (212) 660-3039 or by email at nlederman@sullivanlaw.com. This Client Alert is provided for general informational purposes only and does not constitute legal advice.

On October 1, 2026, the U.S. Securities and Exchange Commission (the "SEC") proposed a comprehensive new custody framework for crypto assets. Subject to significant conditions, the proposal would permit SEC-registered investment advisers to self-custody certain client crypto assets when no qualified custodian is reasonably available for the particular asset. It also would permit registered investment companies and business development companies ("BDCs," and together with registered investment companies, "regulated funds") to maintain certain crypto assets with their investment advisers, subject to additional requirements and board oversight, rather than with a bank or broker-dealer custodian. The proposal would further permit certain state trust companies meeting specified conditions to serve as custodians of crypto assets and related cash or cash equivalents.  Finally, numerous amendments unrelated to crypto assets would modernize the custody frameworks under the Investment Advisers Act of 1940 (the "Advisers Act") and the Investment Company Act of 1940 (the "1940 Act"). 1. Crypto Custody and Self-Custody Under the existing Advisers Act custody rule, registered investment advisers generally must maintain client funds and securities with a “qualified custodian.” The proposal would create a new provision allowing an adviser to self-custody client crypto assets for which it provides investment advice when specified conditions are satisfied. The proposal reflects the SEC's recognition that the limited number of qualified crypto custodians may increase concentration risk, limit investment opportunities, and raise costs for investors. For advisory clients other than registered funds, the proposed self-custody provision would apply only to crypto assets that are client funds or securities. For these purposes, “self-custody” would mean possession of any portion of a client crypto asset’s “key materials,” which are the cryptographic private keys, or any part of them, necessary to access and effectuate transactions in the asset.  Self-custody would be available only if the adviser first determines in writing, after due inquiry, that it has a reasonable basis for believing that no qualified custodian will maintain the particular crypto asset. The determination must be made separately for each crypto asset and reassessed at least quarterly. If a qualified custodian subsequently becomes available, the adviser would be required to place the crypto asset with that custodian as soon as reasonably practicable. Advisers relying on self-custody also would be subject to significant operational safeguards, including: Safeguarding expertise and systems. Have and document appropriate expertise to safeguard each relevant crypto asset and maintain systems designed to protect against loss, theft, misuse and misappropriation, including private-key management and joint authorization of crypto asset transfers by two or more designated persons, at least one of whom must be a management person; Client asset separation. Maintain each client’s crypto assets in one or more crypto asset addresses storing only that client’s crypto assets; Cybersecurity. Mitigate cybersecurity risks and review safeguarding systems and cybersecurity controls, and the effectiveness of their implementation, at least annually; Internal controls. Obtain an internal control report from an independent public accountant within six months of taking self-custody and annually thereafter; Client reporting. Provide prescribed account information to clients at least quarterly; and Financial asset treatment. Agree with the client in writing to treat each self-custodied crypto asset as a “financial asset” under State law adopting UCC Article 8.  According to the SEC, the UCC Article 8 election is intended to strengthen a client's property rights in self-custodied crypto assets and enhance protections in the event of adviser insolvency. 2. State Trust Companies as Permitted Custodians for Crypto Assets The proposal also would permit certain state trust companies that satisfy specified conditions to serve as custodians of crypto assets and related cash or cash equivalents.  Before relying on a state trust company as a crypto custodian, an adviser or regulated fund would be required to satisfy specified diligence and oversight requirements, including: State authorization. Having a reasonable basis, after due inquiry, for believing that the State trust company is authorized by the relevant State banking authority to provide crypto asset custody; Safeguarding policies and procedures. Having a reasonable basis, after due inquiry, for believing that the State trust company maintains and implements written policies and procedures reasonably designed to safeguard crypto assets and related cash or cash equivalents from theft, loss, misuse and misappropriation; Audited financial statements. Receiving and reviewing the State trust company’s most recent annual audited financial statements; Internal controls. Receiving and reviewing the State trust company’s most recent internal control report; and Asset segregation. Ensuring that client and regulated fund crypto assets are segregated from the State trust company’s proprietary assets, with regulated funds entering into custodial services agreements providing for that segregation. The applicable determinations and reviews generally would be required initially and annually thereafter. 3. Regulated Funds, BDCs and Custody Modernization The proposal also would revise the 1940 Act custody framework as it pertains to crypto assets. Proposed Rule 17f-9 would permit a regulated fund to maintain crypto assets that are securities or similar investments through its investment adviser if the adviser satisfies the proposed self-custody requirements and the regulated fund meets additional conditions, including board oversight. The proposal also would amend the existing 1940 Act custody rules to address their application to BDCs. Unlike many existing custody arrangements, the proposal would require fund boards to make affirmative determinations regarding adviser self-custody and to review the adviser's qualified-custodian analysis on an ongoing basis. Initially and annually, the board would be required to determine that a fund crypto asset would be subject to reasonable care if self-custodied with the fund’s investment adviser. Initially and quarterly, the board would review the adviser’s determination that no qualified custodian will maintain the asset. The board also would designate the supervised persons permitted to access the relevant key materials. More broadly, the SEC would modernize the 1940 Act custody rules by expanding the universe of broker-dealers eligible to serve as custodians under Rule 17f-1 to include all registered broker-dealers, subject to conditions tied to the broker-dealer customer protection rule. The proposal also would rescind Rule 17f-3 and make conforming amendments to other custody rules. Sullivan Observations For self-custody, an investment adviser's determination of "custodial availability" is likely to be challenging to implement. Advisers wishing to rely on self-custody would need to establish and document a process for evaluating custodial availability on an asset-by-asset basis and reassessing those determinations at least quarterly. The operational burden associated with ongoing market monitoring may be substantial. State trust companies may emerge as the primary beneficiaries of the proposal. Although much attention will focus on adviser self-custody, the proposal may be most consequential for state-chartered trust companies seeking to expand crypto custody offerings under a federally recognized framework. The proposal reaches tokenized financial products, not just crypto assets.  Because the proposed definition of "crypto asset" includes tokenized securities and other tokenized financial instruments, the proposal likely would have implications that extend beyond traditional cryptocurrency markets. The redesignation of Rule 206(4)-2 to Rule 223-1 may be more consequential than it first appears. The SEC proposes to move the custody rule from Rule 206(4)-2 under the Advisers Act's anti-fraud provisions to proposed Rule 223-1 under Section 223, the statutory provision specifically addressing adviser custody. While presented as a redesignation, the change may signal an evolution in the SEC's view of custody regulation: from a measure designed principally to prevent fraud to a standalone regulatory framework for safeguarding client assets. Advisers should watch closely whether this change affects the future development, interpretation and enforcement of the custody rules. Notably absent is a general crypto trading-platform custody framework. Although the proposal addresses adviser self-custody, regulated fund custody and state trust company custodians, it does not provide a broader framework governing how digital assets may be held and transferred through crypto trading venues. As a result, important questions concerning the custody implications of trading-platform structures remain unresolved. The proposal gives fund boards a meaningful role in self-custody arrangements. The proposed fund self-custody framework requires board oversight. This raises a practical governance question as to whether fund directors will have the information and resources necessary to oversee the highly technical custody arrangements contemplated by the proposal. The proposal provides additional clarity concerning investment adviser discretionary trading authority. The SEC proposes to specify circumstances under which authorized discretionary trading authority would be excepted from application of the Advisers Act custody rule. The industry has long sought greater clarity regarding when trading authority results in custody, and advisers will want to assess whether the proposed framework provides the clarity sought, including with respect to delivery-versus-payment and non-delivery-versus-payment arrangements. The PCAOB requirement would be eliminated. The proposal would eliminate the requirement that independent public accountants engaged to perform services under the Advisers Act custody rule be registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board. The proposal’s broader modernization amendments also merit attention. Among other changes, the proposal would modify the pooled investment vehicle audit provision, including delivery deadlines for certain funds of funds and pooled investment vehicles formed toward fiscal year-end. It also would provide relief for certain standing letters of authorization and inadvertent custody, add related recordkeeping requirements, amend Form ADV and Form N-CEN to reflect the proposed custody framework and collect additional information, and make conforming amendments to Form ADV-E to reflect the redesignation of the Advisers Act custody rule. What Comes Next Public comments are due by December 7, 2026. Advisers, regulated funds and fund boards should consider how the proposed self-custody conditions, the potential use of State trust companies as crypto custodians, and the broader custody-rule modernization amendments could affect existing and potential custody arrangements. For More Information This Client Alert has been prepared by Partners John Hunt, Rachael Schwartz, and Stephanie Monaco, and Associate Ida Vanto, each in the Investment Management practice group of the international law firm of Sullivan & Worcester LLP.  For more information, Mr. Hunt may be reached in our Boston office by calling +1 (617) 338-2961 or our London office by calling +44 (0)20 7448 1000, or by email at jhunt@sullivanlaw.com; Ms. Schwartz may be reached in our New York office by calling +1 (212) 660-3069 or by email at rschwartz@sullivanlaw.com; Ms. Monaco may be reached in our Washington, D.C. office by calling +1 (202) 775-1202, or by email at smonaco@sullivanlaw.com; and Ms. Vanto may be reached in our New York office by calling +1 (212) 660-3045, or by email at ivanto@sullivanlaw.com. This Client Alert is provided for general informational purposes only and does not constitute legal advice.