The SEC’s Custody Rule dates back to 1962. Ethereum launched in 2015. And now registered investment advisers are supposed to figure out how to squeeze DeFi yield strategies through a compliance framework that was designed when “onchain” wasn’t even a word.
Galaxy Asset Management published a perspective piece on June 18 tackling exactly this friction point. Co-authored by venture legal counsel Ian Irlander and legal intern Nora Joyce, the piece lays out why RIAs face structural barriers when trying to deploy client capital into decentralized finance protocols, and what they can actually do about it.
The core problem: qualified custodians meet smart contracts
The Custody Rule, formally known as Rule 206(4)-2, exists to protect client assets managed by investment advisers. It requires RIAs to hold client funds with “qualified custodians,” a category that includes banks, broker-dealers, and certain trust companies.
When an RIA wants to deploy capital into a DeFi protocol, the interaction happens directly onchain through smart contracts. There’s no bank sitting in the middle holding assets. There’s no traditional custodian signing off on each transaction. The assets move through code, governed by protocol rules rather than institutional intermediaries.
