Oct. 20, 2023
Dear SEC, While this goal of this proposed ruling is commendable, the rule may be too broad in its scope for some industries or markets, particularly those that are not heavily involved in traditional financial transactions involving securities. In such cases, this rule could be modified or refined to better align with the needs and concerns of these industries or markets. Interacting with ‘true’ blockchain code is not ‘custody’. According to PwC, digital assets exist only as code on a blockchain. There are no traditional clearinghouses and gatekeepers, transactions are irreversible and the user is responsible for following their transactions. Trustless systems work and achieve consensus mainly through the code, asymmetric cryptography, and protocols of the blockchain network itself. The trustless environments that blockchains have created enable the peer-to-peer (P2P) sending and receiving of transactions, smart contract agreements, and more. In the blockchain industry, ‘trustlessness’ means that you don’t need to place your sole trust in any one stranger, institution, or other third party in order for a network or payment system to function. In a trustless system, you can trust in the system without needing to trust in the parties with which you’re transacting. This is because computers verify each transaction with sophisticated algorithms to confirm the transfer of value and create a historical ledger of all activity. The computers that form the network that are processing the transactions are located throughout the world and importantly are not owned or controlled by any single entity. The process is real-time and much more secure than relying on a central authority or central exchange to verify a transaction. A smart contract is a self-executing digital contract that is stored on a blockchain and automatically executes when certain conditions are met. Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified. One of the key features of blockchain is that it enables users to maintain control over their own data and assets, rather than relying on a central authority to hold and manage them. The concept of decentralized ownership and control, described as "non-custodial," meaning that the user has direct access to their funds and other assets without the need for an intermediary to hold or manage them. This non-custodial nature of blockchain technology is a major reason why it is used in applications related to finance, such as cryptocurrencies, as well as supply chain management and other industries. To summarize, this ruling should be focused on Custodial financial systems like those where intermediaries like banks or other financial institutions hold and manage users' assets on their behalf. The ruling would need to identify ‘custodial’ type industries and ensure their compliance while protecting the innovation of ‘Non-Custodial’ blockchain and applications that move us in the right direction to better protect investors. Sincerely,