Oct. 15, 2023
The SEC’s move to extend its rule from “funds or securities” to “assets” may be seen as overstepping its bounds when it comes to cryptocurrency and digital assets, potentially stifling innovation in this field by subjecting advisors who hold client crypto-assets to unwarranted regulations. Advisors dealing with crypto-assets may face difficulties due to the proposed requirement for possession or control given these asset’s unique characteristics such as their decentralized nature and reliance on private keys. In cases of bankruptcy or financial losses involving an advisor or custodian with custody of crypto-assets, the proposed segregation requirements may not provide adequate protection. It is important to consider whether the proposed requirements would prevent a third party’s lien against one client’s assets from being improperly attached to other clients’ investments. The SEC’s proposal fails to recognize the unique characteristics of cryptocurrencies and digital assets which operate on decentralized networks. The proposed reporting requirements may place an undue burden on advisors dealing with crypto-assets due to the complex nature of this market. The SEC should consider alternative approaches that promote investor protection without stifling innovation in regulating crypto-assets. The proposed amendments may discourage advisors from offering services related to crypto-assets due to increased regulatory burdens. Rather than imposing stringent regulations, the SEC should prioritize investor education regarding the risks and benefits of investing in crypto-assets. Expanding the definition of “custody” to include digital assets could have unintended consequences for advisors. To conclude, concerns have been raised about overreach and insufficient consideration of unique asset characteristics in the SEC’s proposal to protect advisory client assets in the cryptocurrency and digital asset sector. The regulatory expansion, possession or control requirement, and segregation requirements may not provide effective investor protection or promote industry innovation. It’s essential for the SEC to collaborate with industry experts to develop regulations that balance investor protection with industry growth. Additionally, prioritizing investor education can empower individuals to make informed decisions about crypto asset investments.