Oct. 15, 2023
As an attorney and individual deeply concerned about the cryptocurrency and digital asset space, I am deeply concerned about the proposed legislation by the SEC regarding the safeguarding of advisory client assets. While I understand the need for regulatory oversight in this rapidly evolving industry, I believe that the SEC's approach in this particular proposal is an overreach that could stifle innovation and hinder the growth of this promising sector. First and foremost, it is important to note that the SEC's jurisdiction primarily lies in the regulation of securities. Cryptocurrencies and digital assets, on the other hand, are a unique asset class that does not neatly fit into existing regulatory frameworks. The SEC's attempt to apply traditional securities regulations to these new technologies is not only misguided but also undermines the potential benefits they can bring to our economy. Furthermore, it is crucial to consider the existing legal landscape surrounding cryptocurrencies and digital assets. The SEC's proposal fails to acknowledge the numerous laws and regulations already in place that govern this space. For instance, the Financial Crimes Enforcement Network (FinCEN) has established robust anti-money laundering (AML) and know-your-customer (KYC) requirements for cryptocurrency businesses. Additionally, the Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes, subjecting them to capital gains tax and reporting obligations. These existing laws adequately address the concerns of investor protection and financial integrity without the need for additional SEC regulations. Moreover, the SEC's proposal could have unintended consequences that harm both investors and market participants. By imposing stringent custody requirements on advisory firms, the proposal may inadvertently discourage smaller firms from entering the market. This could lead to a concentration of power in the hands of a few large players, reducing competition and potentially increasing systemic risk, as we recently saw on display with the FTX collapse. It is important to foster a diverse and competitive marketplace that encourages innovation and provides investors with a wide range of options. Additionally, the SEC's focus on custody overlooks the fact that many digital assets are designed to be self-custodial. Cryptocurrencies like Bitcoin and Ethereum, for example, are built on decentralized networks that allow individuals to hold and control their own assets without the need for intermediaries. By imposing custody requirements, the SEC is effectively stifling the very essence of these technologies and limiting the freedom and autonomy of individuals to manage their own financial affairs. Just because an asset exists in digital form doesn’t mean it should be subject to more onerous regulations than its physical equivalent. I do not need to register the cash in my wallet or the photographs on my wall. Yet if they existed in digital form, the SEC would seek to regulate them. Finally, the SEC's proposal fails to recognize the global nature of cryptocurrencies and digital assets. These technologies operate on borderless networks that transcend jurisdictional boundaries. Imposing strict regulations on U.S.-based firms may only serve to further drive innovation and economic activity offshore, where regulatory burdens may be less stringent. This could result in a loss of talent, investment, and economic growth for the United States. Senator Lummis (R-WY) has recently noted that US regulatory policy (or lack thereof) is “pushing the [crypto] industry to other countries.” In conclusion, while I acknowledge the importance of regulatory oversight in the cryptocurrency and digital asset space, I believe that the SEC's proposed legislation regarding the safeguarding of advisory client assets is an overreach that could hinder innovation, limit individual autonomy, and drive economic activity offshore. Instead of imposing additional regulations, the SEC should work collaboratively with industry stakeholders to develop a balanced regulatory framework that fosters innovation, protects investors, and promotes the growth of this promising sector. By taking a nuanced and thoughtful approach, we can ensure that the potential benefits of cryptocurrencies and digital assets are realized while addressing legitimate concerns regarding investor protection and financial integrity.