Oct. 22, 2023
Date: October 22, 2023 To: Securities and Exchange Commission From: James Russell Subject: Public Comment on the "Safeguarding Advisory Client Assets" Proposal (File No. S7-04-23) Dear Members of the Securities and Exchange Commission, I am writing to provide my public comment on the proposed rule changes regarding the safeguarding of advisory client assets. While I appreciate the SEC's efforts in enhancing investor protections and addressing gaps in the custody rule, I would like to express my concerns regarding the potential negative impact on decentralized finance (DeFi) and the challenges posed by poorly defined terms, particularly in relation to digital assets or cryptocurrencies. DeFi, characterized by decentralized networks and smart contracts, has emerged as a revolutionary force in the financial industry. By leveraging blockchain technology, DeFi projects offer innovative financial products and services, potentially transforming the traditional financial system and empowering individuals with greater access to financial opportunities. However, the proposed rules may inadvertently hinder the growth and development of DeFi projects, limiting innovation and potentially compromising their ability to provide financial inclusion. One particular area of concern is the inclusion of digital assets, such as cryptocurrencies, within the proposed rule. Digital assets have introduced novel challenges to the regulatory framework due to their unique characteristics and the rapidly evolving nature of the underlying technology. While I recognize the importance of safeguarding client assets, it is imperative that regulatory frameworks take into account the specific nuances of digital assets and the underlying blockchain technology they are built upon. One specific concern lies with the poorly defined terms within the proposed rule. Clear and precise definitions are crucial in ensuring effective regulatory oversight and a level playing field for all market participants. Without accurate definitions, both innovators and investors may face ambiguity and uncertainty, potentially stifling the growth of the digital asset industry. It is essential to establish clear definitions that are capable of encompassing the broad range of digital assets and DeFi applications, while also considering their unique mechanics and functionalities. Additionally, the proposed rule's shift toward relying on qualified custodians may not adequately address the challenges associated with proving exclusive control over digital assets. The complexities of decentralized networks and self-custodied wallets require a flexible and balanced approach to custody requirements. While I understand the need for investor protection, it is crucial to avoid overly burdensome expectations on custodians, especially in the context of digital assets. In light of these concerns, I urge the Securities and Exchange Commission to carefully consider the potential negative impact on DeFi projects and the challenges posed by poorly defined terms within the proposed rule. A balanced approach that promotes investor protection while fostering innovation and competition in the digital asset space is necessary for sustainable long-term growth. Thank you for considering my comments on this important matter. I appreciate the opportunity to provide input on the proposed rule changes. Should there be any further discussions or information required, please do not hesitate to reach out. Sincerely, James Russell