Oct. 19, 2023
Dear Securities & Exchange Commission, Re: Public Comment on "Safeguarding Advisory Client Assets", File No. S7-04-23 I am writing to provide my public comment on the proposed rule "Safeguarding Advisory Client Assets" by the Securities & Exchange Commission (SEC). While I appreciate the SEC's efforts to enhance investor protections and address gaps in the custody rule, I have concerns regarding both the inadequate consideration of the unique properties of cryptocurrency and the potential impact on the digital asset industry as well as the potential overreach of regulatory authority in this matter. While the aim of enhancing investor protections and addressing the gaps in the custody rule is commendable, it is important to ensure that the SEC's regulatory authority is indeed exercised within its established parameters. My first concern is the inclusion of cryptocurrencies within the purview of the proposed rule. Cryptocurrencies and other digital assets have gained prominence and are terraforming the financial landscape. The regulatory framework for these assets is still evolving, and it is important to avoid stifling innovation with red tape. Regulations, in my view, should not be overly burdensome. Further, an open question is where digital assets, like cryptocurrency, fall within the broader collection of regulatory agencies. The regulatory field is a complex one, with multiple agencies overseeing different aspects of the financial industry. It is thus crucial that each agency operate within its own jurisdiction and maintain clarity in order to avoid overlapping or conflicting regulations. I hope to see the SEC collaborate with other regulatory agencies, such as the Commodity Futures Trading Commission, to ensure a unified and cohesive approach to the regulation of digital assets, including cryptocurrencies. Digital assets like cryptocurrencies have emerged as a transformative technology in the financial sector. Blockchain technology provides a decentralized ledger system that ensures transparency, security, and immutability of transactions. The proposed rule, however, does not adequately acknowledge the decentralized nature and technological complexities of cryptocurrency, leading to impractical regulatory requirements for investment advisors. With blockchain's decentralization, it is difficult to attribute exclusive control to a single entity. The SEC's proposed rule extends the coverage of the custody rule to include a broader range of investments held in a client's account, including digital assets. While protecting investor assets is crucial, it is equally important to consider the unique characteristics and challenges associated with safeguarding digital assets. The decentralized nature of cryptocurrencies make them very different from traditional securities and thus they require a nuanced approach to regulation. In its current form, the proposed rule could stifle innovation, hinder market participation, and disproportionately burden investment advisers who operate in the digital asset space. The rule's existing provisions, such as demonstrating exclusive control over digital assets, pose significant challenges due to the inherent technological design of cryptocurrencies. The SEC should consider engaging with industry experts and stakeholders to develop tailored regulations that effectively balance advancements in investor protections and innovations. Additionally, the proposed rule's requirements for securely maintaining digital assets with a qualified custodian overlook the availability of technological solutions, like cold storage and multi-signature wallets, that provide robust security measures. Imposing strict custodial requirements without considering these advancements may limit people's investment opportunities while at the same time failing to adequately mitigate the risks involved. Please consider a principles-based approach that will allow for adaptive regulation, as opposed to a uniform regulation. In this way, investment advisors could develop safeguards that are appropriate to the individual characteristics and risks associated with digital assets while still protecting investors. Recognizing that the SEC is committed to enhancing investor protections, I kindly ask the Commission to consider the unique nature of digital assets when developing what I hope will be flexible and technology-neutral rules for the safeguarding of advisory client assets. Engagement with the digital asset industry would enable the SEC to foster an innovative environment that can both protect investors and support the growth of this unique and transformative technology. I very much appreciate the opportunity to comment and for the SEC's consideration of my remarks on this important matter. Warm regards, Linda Gural