Galaxy: Structural Conflict Between US SEC Custody Rules and DeFi Demand, RIA On-Chain Asset Allocation Constrained

Odaily Planet Daily reported that Galaxy stated in a post on X that many Registered Investment Advisors (RIAs) face significant challenges in meeting the compliance requirements of the US SEC's Custody Rule while also responding to client demand for allocating funds to DeFi. The current rule requires client assets to be held with a Qualified Custodian (QC), effectively excluding the self-custody pathway, making it difficult for traditional financial accounts to directly participate in DeFi strategies.

However, in practice, the technical compatibility and compliance integration costs between custodians and new public chains, tokens, and DeFi protocols are high. Most custodians also lack the capability to support DeFi interactions, creating a persistent "compliance infrastructure gap." Meanwhile, fiduciary duties require RIAs to not simply dismiss client demand for DeFi exposure, placing institutions in a structural conflict between compliance and investment intentions.

Galaxy believes that a potential future solution lies in establishing a principles-based regulatory framework. This framework could include MPC key management, governance controls, third-party audits, on-chain transparency, and rigorous protocol due diligence mechanisms, with the aim of unlocking on-chain asset allocation capabilities without undermining regulatory objectives.