Below are Public Comment Concerns on Proposed Amendments to Custody Rule File No. S7-04-23. Thank you for your consideration. 1. INEFFECTIVE ENFORCEMENT MECHANISMS IN PROPOSED RULE 206(4)-2 AMENDMENTS The proposed amendments to Rule 206(4)-2 seek to enhance investor protections by expanding the custody rule to cover cryptoassets and imposing stringent requirements on qualified custodians. However, the amendments fail to provide effective enforcement mechanisms to ensure compliance with the new requirements. The proposed rule places significant reliance on investment advisers to conduct proper due diligence on qualified custodians and obtain written assurances that custodians will comply with the rule. But investment advisers have limited investigative resources compared to regulators and lack enforcement authority over custodians. As evidenced by recent crypto scandals, sole reliance on investment advisers is insufficient - qualified custodians have failed to properly segregate assets despite written assurances. More effective enforcement requires direct SEC oversight of custodians. The Dodd-Frank Act granted the SEC examination authority over any entity classified as a custodian under the Investment Advisers Act, including state-chartered trusts. See 15 U.S.C. § 80b–4. This allows the SEC to directly examine custodian compliance. However, the proposed amendments do not discuss how the SEC will utilize this examination authority to enforce the new requirements. Without a concrete examination and enforcement plan, the protections of the amended rule will ring hollow. The SEC should also leverage its broad enforcement powers under the Exchange Act against crypto exchanges that act as unregistered custodians. The SEC has authority to investigate securities law violations and bring civil actions seeking injunctions or monetary penalties. See 15 U.S.C. §§ 78u(a), 78u(d). The proposed amendments prohibit using exchanges as custodians unless properly registered, providing a clear mechanism for the SEC to curb unlawful conduct. But again, the proposing release lacks discussion of how the SEC will police crypto exchanges holding customer assets. Robust SEC oversight and enforcement is essential to effective implementation of the proposed custody rule enhancements. The amendments should be revised to detail concrete examination and enforcement policies to ensure custodians comply. Reliance on investment advisers is insufficient - only proactive SEC enforcement can provide true protection. 2. THE PROPOSED RULE VIOLATES THE FOURTH AMENDMENT PARTICULARITY REQUIREMENT The proposed SEC rule requiring advisers to hold crypto assets at federally regulated banks violates the Fourth Amendment's particularity requirement. The Fourth Amendment protects against unreasonable searches and seizures, requiring warrants to "particularly describ[e] the place to be searched, and the persons or things to be seized." U.S. Const. amend. IV. This particularity requirement prevents general warrants authorizing "wide-ranging exploratory searches." Maryland v. Garrison, 480 U.S. 79, 84 (1987). By mandating that advisers use only certain federally regulated banks as "qualified custodians," the proposed rule essentially requires a general warrant for SEC access to records and crypto assets held in custody there. The proposed rule should allow advisers flexibility in choosing qualified crypto custodians that meet security and segregation requirements. There are state-regulated trust companies and non-bank entities that can adequately secure crypto assets and records. Requiring advisers to use only federally regulated banks provides an unreasonable level of SEC access that enables unfettered "exploratory searches" of crypto custody records and accounts. The SEC could access any records or accounts at these institutions on the basis that they fall under the custody rule's ambit. This undermines the particularity requirement's purpose to prevent general warrants and arbitrary government searches and seizures. See Stanford v. Texas, 379 U.S. 476, 481 (1965). The proposed rule should be revised to comply with the Fourth Amendment's particularity requirement. Advisers should have discretion to use any qualified custodian that meets security protocols, avoids conflicts of interest, and contractually agrees to provide records pursuant to lawful requests. Mandating federally regulated bank custody effectively provides the SEC an unconstitutional general warrant. The rule should be limited to protect against arbitrary access and searches, consistent with the Fourth Amendment principles articulated in Garrison and Stanford. 3. REGULATORY CAPTURE ENABLES EXISTING QUALIFIED CUSTODIANS TO MONOPOLIZE CRYPTO CUSTODY SERVICES The SEC’s proposed amendments to Rule 206(4)-2 create unnecessary and unjustified barriers to entry that would allow existing qualified custodians to monopolize crypto custody services, to the detriment of investors. This violates the SEC’s mandate of facilitating fair competition under Section 11A of the Securities Exchange Act. Section 11A of the Exchange Act requires the SEC to use its authority under this title to facilitate the establishment of a national market system for securities in accordance with Congressional findings that competition and innovation reduce excessive profits and costs to investors. Competition from state-chartered trusts and decentralized protocols provides this innovation the SEC is mandated to facilitate. The proposed amendments disregard Congress’s intent and findings in adopting Section 11A. They would instead enable regulatory capture by existing qualified custodians and thwart the emergence of decentralized finance. As the D.C. Circuit has recognized, an agency that has lost sight of its overriding obligations often exhibits symptoms of tunnel vision, an undue fixation on its own regulatory mission at the expense of embrace of Congressional objectives writ large. See Public Citizen v. FAA, 988 F.2d 186, 197 (D.C. Cir. 1993). 4. UNFAIR MARKET ADVANTAGES WOULD RESULT FROM THE PROPOSED RULE 206(4)-2 AMENDMENTS The proposed amendments to Rule 206(4)-2 would impose significant and unjustified burdens on investment advisers seeking to custody crypto assets on behalf of clients. These burdens would create unfair market advantages for large, established custodians and exchanges at the expense of small investment advisers, new entrants, and emerging technologies. This violates the principles of fair competition undergirding the securities laws. Under the proposed rule, custodians of crypto assets would face stringent requirements that do not account for the unique properties of crypto assets and emerging custody solutions. As the proposing release acknowledges, proving “exclusive possession or control” of crypto assets poses novel challenges compared to traditional securities. However, the release suggests that crypto custodians must nonetheless meet the same exclusive possession or control standard, without providing guidance on how this could be achieved. Imposing such an ambiguous requirement violates basic principles of fair notice and due process. As one court has noted, a statute or regulation “which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application violates the first essential of due process of law.” Connally v. General Construction Co., 269 U.S. 385, 391 (1926). The proposed custody requirements for crypto assets fail to provide fair notice and invite inconsistent, arbitrary enforcement. In addition, the burdens imposed under the proposed amendments would restrict market access for new crypto custodians and asset managers. As Commissioner Peirce noted in her dissent, the proposal “seems designed to steer advisers away from the use of crypto assets and toward the use of more ‘traditional’ asset classes” (Peirce Dissent at 2). This conflicts with the basic objective of the securities laws to promote fair and open markets. See e.g., Securities & Exchange Commission v. Ralston Purina Co., 346 U.S. 119, 124 (1953) (purpose of Securities Act is to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce). The proposed rule amendments would tilt the playing field to the advantage of large, established custodians and exchanges. It would impose significant barriers to entry that smaller investment advisers and emerging custodians could not overcome. This violates the basic principle that regulation should seek to foster competitive markets, not entrench incumbents. Accordingly, the Commission should reconsider the proposed amendments and provide clear, workable guidance for crypto custody that does not create unfair advantages. 5. THE PROPOSED RULE VIOLATES THE INTENT OF THE FINANCIAL PRIVACY ACT The proposed amendments requiring investment advisers to maintain “exclusive possession or control” of crypto assets held in custody would undermine the intent of the Financial Privacy Act by enabling unnecessary government surveillance of Americans’ financial transactions. While the SEC undoubtedly has a duty to protect investors, it should not adopt rules that empower regulators to broadly monitor the flow of digital currencies. The Financial Privacy Act of 1978 was enacted to curb government overreach in collecting individuals’ financial records from banks and other financial institutionsl. The accumulation on a routine basis of sensitive, personal financial information on individuals, without their consent and for no apparent legitimate governmental purpose, represents an unwarranted and intolerable invasion of personal privacy. The Act thus imposed limits on federal agencies’ ability to access customers’ financial records without proper legal process. In interpreting the Financial Privacy Act’s intent, courts have recognized that the law aims to preserve both individuals’ reasonable expectations of privacy and the confidential nature of the bank-customer relationship. See In re McVane v. FDIC, 44 F.3d 1127 (2d Cir. 1995). As the Second Circuit explained, Congress determined that an individual’s interest in keeping secret the details of his or her financial transactions and accounts outweighed a potential governmental interest in having unfettered access to and control over those records. Id. The proposed custody rule runs contrary to the Financial Privacy Act by enabling the routine, nonconsensual transmission of American citizens’ crypto transaction records to the government. The SEC’s requirement that advisers maintain “exclusive possession or control” of crypto assets would likely necessitate advisers’ use of custodial systems where the government can potentially access all transaction-level data. This would eviscerate individuals’ reasonable expectation of privacy in crypto transactions and allow precisely the sorts of unfettered government access to financial records that Congress prohibited. Such routine government surveillance threatens liberty and chills lawful behavior. See United States v. Di Re, 332 U.S. 581, 595 (1948) (warning about risks of unfettered police surveillance). Rather than impose a broad surveillance mandate, the SEC should adopt a custody framework that preserves Americans’ reasonable privacy expectations. The Commission could still advance its goals of protecting investors and preventing fraud by simply requiring proper due diligence and standardized disclosures from crypto custodians, without compelling the adoption of maximally transparent custodial architectures. The SEC should not arrogate to itself powers that subvert Congress’ intent in enacting the Financial Privacy Act. 6. THE PROPOSED RULE INSUFFICIENTLY COLLABORATES WITH OTHER COUNTRIES AND INTERNATIONAL ORGANIZATIONS The SEC's proposed amendments requiring investment advisers to maintain "exclusive possession or control" over client crypto assets held with a "qualified custodian" insufficiently account for international collaboration. The proposed requirements could conflict with existing laws and regulations in foreign jurisdictions. This creates significant uncertainty for investment advisers with global operations. The SEC should modify the proposal to explicitly permit reliance on non-U.S. qualified custodians that satisfy comparable regulatory standards in their home jurisdictions. Section 206 of the Advisers Act grants the SEC broad authority to define prohibited fraudulent, deceptive, or manipulative conduct by investment advisers. But the SEC should avoid extraterritorial application of U.S. custody requirements where reasonable alternatives exist. The proposal could also conflict with free trade agreements like NAFTA. Those agreements prohibit signatory countries from imposing domestic regulations that create unnecessary obstacles to trade. The SEC should actively coordinate with foreign regulators to develop shared international standards for crypto asset custody. This would avoid conflicts while still achieving the SEC's investor protection goals. The SEC could look to principles for cross-border cooperation articulated in international agreements like IOSCO's Multilateral Memorandum of Understanding. That agreement provides for mutual recognition and enforcement assistance while still permitting countries to apply their own laws and regulatory approaches. Following these principles would enable collaboration on developing baseline custody standards globally applicable to crypto assets and advisers. The goal should be a coordinated international approach - not a unilateral U.S. mandate. As many elected representatives have observed, crypto assets do not neatly fit into existing regulatory buckets due to their truly global nature. The custody rule proposal ignores this reality. The SEC must work proactively with foreign counterparts to develop shared solutions. Imposing U.S. requirements without regard to other countries and international organizations is counterproductive. The SEC should revise the proposal accordingly. 7. LACK OF HARMONIZATION BETWEEN FEDERAL AND STATE OVERSIGHT OF CRYPTO CUSTODIANS The SEC's proposed amendments to the custody rule fail to harmonize the federal and state oversight frameworks applicable to qualified crypto asset custodians. This lack of harmonization would undermine investor protection and stifle responsible innovation in the digital asset industry. The SEC should reconsider its overly prescriptive approach and develop a framework that better integrates federal and state oversight of crypto asset custodians. The SEC's proposed rule takes an absolutist position that crypto platforms cannot serve as qualified custodians, despite several states having established regulatory frameworks for licensing and overseeing crypto custodians. This rigid stance ignores the significant investor protections provided under state regulatory regimes and the OCC's interpretive letters permitting national banks to provide crypto custody services. It would force advisory clients to use only SEC-approved custodians, limiting client choice and adviser flexibility. The SEC's position conflicts with Congress's intent under the National Securities Markets Improvement Act of 1996 ("NSMIA") to delineate regulatory authority over securities-related entities between the SEC and the states. NSMIA preserves the states' authority to regulate certain securities intermediaries, including investment advisers up to $100 million in assets under management. 15 U.S.C. § 77r(a)(1)(A); 15 U.S.C. § 80b–3a(a). By precluding state-regulated crypto custodians from qualifying under the custody rule, the SEC exceeds its authority under NSMIA. Further, the proposed rule is inconsistent with the basic premise of functional regulation that regulatory authority should depend on an entity's activities rather than its charter. See, e.g., Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999); see also Conference of State Bank Supervisors v. Office of Comptroller of Currency, 313 F. Supp. 3d 285, 304 (D.D.C. 2018). The SEC's substance-over-form approach to evaluating crypto custodians regulated by banking agencies at the federal and state levels represents a departure from functional regulation principles. Rather than take an exclusionary approach, the SEC should recognize state-regulated crypto custodians that implement robust custody protections akin to those under the proposed rule. This balanced framework would harmonize federal and state oversight to achieve the SEC's investor protection objectives while fostering responsible crypto asset custody arrangements. The SEC could accomplish this by clarifying the definition of "qualified custodian" to include state-regulated entities meeting specified criteria. Harmonizing federal and state regulation of crypto custodians would strengthen investor safeguards while supporting responsible innovation in digital asset custody. The SEC should reconsider its proposal to better integrate state regulatory regimes. 8. THE PROPOSED RULE IS PREMATURE AND LACKS ENDURING FRAMEWORKS OR SYSTEMS AROUND CRYPTO CUSTODY The SEC's proposal to amend the custody rule to encompass digital assets is premature. Before imposing strict custody requirements on registered investment advisers (RIAs), the SEC must first establish regulatory clarity around digital asset custody itself. Subjecting RIAs to strict custody requirements in the absence of clear standards on custody would undermine basic principles of due process and fairness under the Administrative Procedure Act. See 5 U.S.C. § 706(2)(A). The SEC's proposal lacks critical details on how entities can comply with the "exclusive possession or control" requirement for digital assets. Unlike traditional securities, the proposal notes that digital assets may be transferred by anyone with the private key, which could preclude exclusive possession or control. Yet the proposal fails to provide any guidance on custody models that might satisfy this requirement. Without establishing standards, the SEC should not subject RIAs to enforcement risk, which implicates due process concerns. See Satellite Broadcasting Co. v. FCC, 824 F.2d 1, 3 (D.C. Cir. 1987) (Potential subjects of an agency's authority are entitled to fair notice of exactly what conduct is regulated.). Moreover, the SEC has not created enduring frameworks around qualified custodian status for state-chartered trusts that custody digital assets. While the proposal does not categorically exclude such trusts, statements by SEC leadership strongly suggest the SEC will not recognize them as qualified custodians. Subjecting RIAs to enforcement risk for lacking a qualified custodian, while simultaneously creating uncertainty about who qualifies, would again undermine basic fairness principles. See id. The SEC should address these fundamental issues first before amending the custody rule: (1) provide guidance on digital asset custody models that could satisfy "exclusive possession or control," and (2) establish pathways for state-chartered trusts to become qualified custodians. Without enduring frameworks on these foundational issues, the proposal is premature and risks arbitrary enforcement actions. The SEC should focus its energies on crafting flexible, technology-neutral standards that provide clarity to the industry while maintaining investor protections. But it should not impose strict custody requirements on RIAs in the absence of such standards. 9. INADEQUATE CONSIDERATION OF ECONOMIC IMPACTS The proposed amendments to the SEC's Custody Rule significantly expand the scope and requirements for investment advisers who have custody of client assets. While the stated intent is to enhance investor protections, the SEC failed to adequately consider the substantial economic burdens the new rules would impose. Specifically, the proposed rules go too far by: -Expanding the definition of "custody" to cover discretionary trading authority. This change would impose custodial requirements on many advisers who do not actually have possession of client assets. -The additional costs are not justified. -Requiring detailed contractual provisions between advisers and custodians. The prescriptive terms mandated by the rule create administrative burdens without materially improving safety. Existing contractual relationships often already provide reasonable protections. -Limiting the exception for privately offered securities. The proposed narrowing of this exception ignores legitimate reasons to hold certain assets outside of custodial relationships. The restrictions proposed are impractical and again lack economic justification. The SEC should re-propose the amendments with more thorough economic analysis, including realistic assessments of compliance costs compared to benefits. As drafted, the rules create barriers to entering the investment advisory business and discourage smaller advisers who cannot bear the increased overhead. Innovation in digital asset custody solutions will also be hampered. While the SEC aims to protect investors, it must also foster fair and efficient markets. As currently proposed, the custody rule changes fail to strike the right balance. The Commission should reconsider with greater attention to the real-world economic impacts. 10. CONFUSING LANGUAGE The proposed amendments to the custody rule introduce unnecessary confusion regarding the requirements for qualified custodians of digital assets. While I agree with the goal of enhancing protection of client assets, the SEC should provide clearer guidance on this issue to avoid deterring responsible innovation in the digital asset custody space. Specifically, the proposing release creates confusion around the concept of "exclusive possession or control" of digital assets for purposes of the custody rule. Proving exclusive control of digital assets may be technically challenging due to their ability to be transferred using private keys. However, applying an overly strict interpretation of "exclusive control" could preclude qualified custodians from developing secure custody solutions that provide meaningful protections aligned with the policy goals of the custody rule. Qualified custodians should have flexibility to demonstrate exclusive control through a combination of technical, operational, and other controls that effectively safeguard client assets. For example, some qualified custodians use a multi-party authorization structure where the custodian holds one key to a multi-signature wallet, with the client holding another, to prevent unauthorized transfers. So long as the custodian has implemented reasonable controls to protect its key, and contractually agreed that it will not authorize transfers without client direction, this type of arrangement should satisfy the exclusive control standard under the custody rule. The focus should be on whether the custodian has implemented controls that meaningfully safeguard client assets, not rigid definitional technicalities. Clarifying this principle in the final rule would provide needed certainty to foster further responsible innovation in digital asset custody solutions. In addition, the proposing release does not provide clear guidance on whether state-chartered trusts that custody digital assets could potentially qualify as custodians under the rule. While citing risks with certain crypto platforms, the SEC does not actually amend the "bank" definition that encompasses certain state-chartered trusts. Providing clarification that sufficiently regulated state trusts focused on institutional digital asset custody could potentially qualify would encourage further development of compliant custody arrangements. Responsible state-regulated entities should have a path to qualify as custodians. I urge the SEC to provide greater clarity in the final amendments regarding qualified custodian requirements as applied to digital assets. Flexibility coupled with focus on meaningful controls over assets will best achieve the policy aims while fostering responsible innovation. Clarifying these issues now will help advisers develop compliant custody arrangements and allow state-regulated custodians to qualify if appropriate standards are met. Thank you for the opportunity to comment. The Proposed Rule 223-1 Lacks Clarity and Precise Language, Potentially Leading to Ambiguity and Misinterpretation, in Violation of Administrative Law Principles The SEC's proposed Rule 223-1 is an attempt to amend and supplement the Advisers Act custody rule to address the custody of digital assets by registered investment advisers (RIAs). However, the language used in the proposed rule lacks the necessary precision and clarity, which may lead to ambiguity and misinterpretation. This is against the principles of clear and unambiguous rulemaking as enshrined in administrative law. Firstly, the proposed rule's use of the term "assets" to include “funds, securities and other positions” is overly broad and fails to provide a clear definition or classification of crypto assets, which is a departure from the current rule where only "funds and securities" are required to be held with a qualified custodian. This vague language contradicts the principles of administrative law that mandates clear and precise rulemaking to ensure that the regulated entities and the public clearly understand the regulatory expectations. Moreover, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is invoked in the proposed rule, does not provide a clear mandate for the broad definition of “assets” as proposed. The lack of clarity on what constitutes "other positions" leaves room for broad interpretation, which may lead to inconsistent application of the rule, thereby defeating the predictability and consistency objectives of rulemaking as per Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Furthermore, the proposed amendment concerning the definition of “custody” based on “possession or control” of the assets is ambiguous. The term "possession or control" is not clearly defined, and the explanation concerning the change of beneficial ownership and the role of a qualified custodian in generating and maintaining private keys for wallets holding crypto assets lacks precision. This ambiguity may lead to varying interpretations and applications, which is against the principles of clear rulemaking as upheld in FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009), where the Supreme Court emphasized the necessity of clear and unambiguous standards in regulatory frameworks. Moreover, the discussion around proving “exclusive possession or control” over crypto assets, especially around private key management and the transferability characteristic of crypto assets, is vague and fails to provide a clear pathway for compliance. The proposed rule sets a high bar for demonstrating exclusive control but does not provide clear guidelines on how this can be achieved, especially in the context of distributed ledger technology which inherently allows for the possibility of multiple parties having control over assets through shared private keys. This lack of clarity could lead to a chilling effect on innovation and the adoption of new technologies, contrary to the spirit of fostering innovation in the financial sector. In conclusion, it is crucial for the SEC to adhere to the principles of clear and precise rulemaking to ensure that the proposed rule provides a clear and unambiguous framework for the custody of crypto assets by RIAs. The vague language and broad definitions used in the proposed rule are likely to lead to confusion, misinterpretation, and inconsistent application, which are in violation of well-established administrative law principles. It's recommended that the SEC revisits the language of the proposed rule to provide clear definitions and precise guidelines to ensure a fair and predictable regulatory environment for all stakeholders. 11. THE PROPOSED RULE THREATENS THE RIGHT TO ECONOMIC PRIVACY The proposed SEC rule seeks to regulate how investment advisers custody crypto assets. While protecting investors is a laudable goal, the rule goes too far by threatening the right to economic privacy. The Supreme Court has long recognized that the Constitution protects a right to privacy in one's personal finances. As the Court stated in Katz, "the Fourth Amendment protects people, not places," and what a person "seeks to preserve as private, even in an area accessible to the public, may be constitutionally protected." Katz v. United States, 389 U.S. 347 (1967). The proposed rule infringes on the right to economic privacy by requiring advisers to relinquish exclusive control over crypto assets to regulated third party custodians. While maintaining assets at qualified custodians provides some investor protections, it comes at the expense of limiting individual financial privacy and autonomy. Investors have a reasonable expectation that their economic transactions will remain private. The proposed rule forces disclosure of financial dealings by mandating use of third party custodians, which erodes individual privacy. Crucially, the government has offered no compelling interest that would justify this intrusion. Without a more narrowly tailored approach, the proposed rule threatens protected liberty interests. Rather than a broad custodial mandate, the SEC should consider more targeted investor protections that do not impinge on the right to economic privacy. For example, the SEC could require disclosure about risks associated with self-custody or mandate certain data security standards without compelling use of third party custodians. More modest requirements like insurance or bonding would protect investors while avoiding serious privacy concerns. In sum, the proposed SEC custody rule goes too far in sacrificing the right to economic privacy. While investor protection is important, constitutional rights should not be abridged when more targeted measures could adequately address regulatory concerns. The SEC must tailor its approach to avoid unnecessarily intruding on reasonable expectations of financial privacy. 12. INEFFECTIVE REPORTING REQUIREMENTS The SEC’s proposed amendments to the custody rule, Rule 223-1, would impose new and impractical reporting requirements on registered investment advisers (RIAs) in relation to crypto assets that fail to meaningfully enhance investor protection. The new reporting standards hold RIAs to an unattainable standard of proving “exclusive control” and create ambiguity around permissible custody models that is likely to discourage crypto asset adoption. The SEC should revise the amendments to provide greater flexibility for RIAs to demonstrate appropriate custody arrangements that adequately safeguard client assets. Rule 206(4)-2, the custody rule, currently requires RIAs to maintain client “funds and securities” with a “qualified custodian”, such as a bank or registered broker-dealer. The proposed amendments would expand this to cover “assets”, including crypto assets, even if not classified as funds or securities. While this broader scope is within the SEC’s authority, the prescribed requirements for custodians to demonstrate “exclusive control” and restrictions on certain custody models go beyond what is reasonably required to achieve the SEC’s policy aims. Notably, the proposed rule states that custody turns on “possession or control” of assets, which requires a custodian to have the exclusive ability to execute transfers or changes in beneficial ownership. However, requiring custodians to prove definitively that no other party could access or control crypto assets sets an unreasonable standard. As noted by multiple commenters, proving a negative in cryptographic systems may be impossible. Instead, the SEC should provide more flexible ways for custodians to evidence adequate controls and protocols to safeguard assets. This could include audit reports, SOC 1/SOC 2 examinations, or other validation procedures already in use. Requiring absolute technical exclusivity in a shared environment like crypto networks goes beyond the level of protection deemed sufficient for traditional assets. The proposed amendments also fail to provide clear guidance on permissible custody models for crypto assets. The SEC questions whether shared custody arrangements like sharding of private keys could satisfy “exclusive control”, but does not outright prohibit these models. This ambiguity is likely to discourage adoption of novel custody solutions tailored to crypto assets. The SEC should provide explicit confirmation that shared custody models are permitted where appropriate controls are in place to prevent unauthorized transfers. Otherwise, advisers and custodians may default to overly restrictive options to the detriment of efficient crypto asset markets. Imposing vague or unattainable standards without clear justification exceeds the SEC’s authority under the Investment Advisers Act of 1940. While the SEC has latitude to require adviser compliance procedures, its rules must be reasonably designed to protect clients and not unduly inhibit development of the crypto asset market. The SEC should revise the proposed amendments to provide workable requirements for RIAs to demonstrate proper custody and oversight of crypto assets. This includes more flexible standards for “control” and explicit allowance of emerging custody models. With these changes, the SEC can achieve its policy aims while enabling continued innovation in the crypto asset space. 13. INCONSISTENCY IN PROPOSED AMENDMENTS TO RULE 206(4)-2 (FILE NO. S7-04-23) The overarching inconsistency is that the proposed rule would impose stringent new requirements on crypto asset custody and qualified custodians, while at the same time I am skeptical whether compliance is even possible. This creates confusion and uncertainty that is counterproductive to the SEC's stated goals of enhancing investor protection. Specifically, the proposing release states that proving exclusive control of a crypto asset may be more challenging and that it may be difficult to actually demonstrate exclusive possession or control of crypto assets. This language calls into question whether any qualified custodian could satisfy the exclusive possession or control standard for crypto assets. Yet the proposed rule does not actually provide a carve-out or different standard for crypto assets. So custodians are left in the dark about what is required for compliance. An asset-based exemption or separate guidance would provide needed clarity. There is also inconsistency around the SEC's view of state-chartered trusts as potential qualified custodians for crypto assets. While the proposed rule does not technically foreclose this possibility, statements by the SEC Chair clearly indicate skepticism of crypto platforms serving as qualified custodians. Again, this leaves industry participants without clear direction. Finally, suggesting that RIAs who self-custody crypto assets are already violating existing rules is inconsistent with the fact that the current custody rule does not explicitly cover crypto assets - only funds and securities. Overall, the mixed messages in the proposing release will lead to confusion, not better policy outcomes. I urge the SEC to resolve these inconsistencies in any final rulemaking to provide clear and consistent direction to market participants. This will enable responsible innovation and access to digital assets - consistent with investor protection. 14. PROPOSED SEC RULE WOULD CREATE UNLEVEL PLAYING FIELD FOR CRYPTO CUSTODIANS The proposed SEC rule imposing heightened requirements on crypto custodians is inconsistent with the SEC's principles-based approach to regulating the securities markets and would create an unlevel playing field that disadvantages certain custodians based solely on the types of assets they hold in custody. By subjecting crypto custodians to stricter standards than custodians of traditional securities, the rule improperly discriminates against firms solely because they engage in the business of crypto custody. Under the proposed rule, crypto custodians would face substantially greater burdens in demonstrating exclusive possession and control of assets compared to traditional custodians. Yet the core custodial function of safeguarding client assets against loss or theft is fundamentally the same regardless of the type of asset held. There is no valid justification for holding crypto custodians to a different and higher standard. Crypto assets have unique properties, but these do not prevent crypto custodians from implementing robust controls and segregation of client assets. The rule should focus on principles and outcomes, not rigid requirements based on asset types. By contrast, the proposed rule takes a prescriptive approach that would impose rigid requirements on crypto custodians that could effectively bar them from qualifying as custodians for SEC-registered investment advisers. This prescriptive approach represents a sharp departure from the SEC's traditional reliance on disclosure, transparency and market discipline to regulate market intermediaries. The proposed rule would thus unfairly restrict investor choice and access to digital asset markets by choking off crypto custody services. And it would deprive crypto custodians of a level playing field to compete in providing innovative custody solutions tailored to digital assets. Rather than impose different standards based on asset types, the SEC should evaluate custodians based on their overall ability to securely hold client assets and provide customers transparency, protections and recourse comparable to traditional custodians. Rigid asset-based distinctions are inconsistent with principles-based regulation and would undermine a core SEC mission - promoting fair and efficient markets. 15. THE PROPOSED RULE'S RETROACTIVE APPLICATION The SEC's proposed amendments seek to retroactively apply new standards for custody of digital assets to investment advisers who have already made reasonable efforts to comply with existing rules. This retroactive application violates basic principles of fairness and due process. The Supreme Court has held that retroactive legislation can present problems of unfairness and violate due process when it impairs vested rights acquired under existing laws. See Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 730 (1984). The Court explained that retroactivity is disfavored because "individuals should have an opportunity to know what the law is and to conform their conduct accordingly." Landgraf v. USI Film Products, 511 U.S. 244, 265 (1994). Here, the SEC proposes to retroactively impose a new interpretation that digital assets are "client assets" for purposes of the custody rule. Investment advisers made good faith efforts to comply with the existing rule covering "funds and securities." They had no notice that digital assets would be deemed "client assets" subject to the full panoply of custodial requirements. The SEC suggests that any RIA currently holding digital assets may already be in violation under the existing rule. But it would be manifestly unjust to take enforcement action based on a new interpretation that reasonable people could not anticipate. Agencies should not punish regulated parties for conduct that reasonably appeared to be lawful under the SEC's then-prevailing pronouncements. Rather than impose an unanticipated retroactive burden, the SEC should adopt a measured transition period that allows investment advisers sufficient time to implement the heightened custodial requirements in good faith. The SEC should also issue guidance clarifying that no enforcement actions will be taken against investment advisers who reasonably determined the custody rule did not apply to digital assets prior to the amendments' effective date. Imposing retroactive requirements in the absence of such formal guidance would violate basic notions of fair notice and due process. It would undermine confidence in the SEC's commitment to evenhanded regulation. And it may raise questions about the amendments' validity. See Bowen v. Georgetown Univ. Hospital, 488 U.S. 204, 208 (1988) ("[C]ongressional enactments will not be construed to have retroactive effect unless their language requires this result."). The SEC should reconsider the proposed retroactive application and implement appropriate safeguards to avoid unfairness. This balanced approach will enable investment advisers to achieve full compliance with the updated custody rule, while respecting their reasonable reliance on the SEC's prior guidance.