Oct. 22, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule "Safeguarding Advisory Client Assets" and its impact on the safeguarding of client assets, particularly in relation to cryptocurrency and digital assets. While I commend the SEC's efforts to enhance investor protections and address gaps in the custody rule, I believe that the proposed rule fails to adequately consider the unique properties and technological complexities of cryptocurrency. Digital assets, such as cryptocurrency, are disrupting traditional financial systems and transforming the way we think about value exchange. However, the SEC's regulatory approach towards these assets often fails to recognize their decentralized nature and the technical intricacies involved in their custody. This lack of understanding leads to impractical regulatory requirements that can impede innovation and hinder the growth of this emerging sector. The proposed rule expands the coverage to include a broader range of investments held in a client's account, which is a step in the right direction. However, it does not sufficiently address the specific challenges associated with the custody of cryptocurrency. The decentralized nature of blockchain technology, which underlies cryptocurrencies, means that custody is often held by the individual asset holder rather than a centralized financial institution. The proposed rule's emphasis on adherence to traditional custody models fails to account for this fundamental shift and imposes unnecessary burdens on market participants. Furthermore, the rule's discussion on demonstrating exclusive control over cryptocurrency assets poses additional challenges. Cryptocurrency custody involves unique cryptographic methods, such as private keys, to secure assets. Requiring investment advisers to demonstrate exclusive control over these assets, as specified in the rule, is not practical given the nature of blockchain technology. This could result in unintended repercussions and deter investment advisers from exploring digital asset solutions. To address these concerns, I propose that the SEC establishes a dedicated framework for regulating custodial practices in the context of cryptocurrency assets. This framework should recognize the decentralized nature of such assets and consider alternative methods of custody beyond traditional financial institutions. It should also take into account existing industry best practices for secure storage and management of digital assets. Additionally, the proposed rule's amendments to the surprise examination requirement could further impede the custody of digital assets. Given that the custodial controls for cryptocurrencies often involve complex cryptographic methods, it may be more appropriate for the SEC to develop alternative examination procedures that are specifically tailored to these innovative assets. Imposing generic requirements on digital asset custodians may not be effective or aligned with the unique risks and characteristics posed by this industry. In conclusion, while I appreciate the SEC's efforts to enhance investor protections and improve the safeguarding of client assets, it is crucial that the agency considers the unique properties of digital assets, such as cryptocurrency, when formulating regulatory requirements. By establishing a dedicated framework that recognizes the decentralized nature and technological complexities of cryptocurrencies, the SEC can strike a balance between investor protection and fostering innovation in this rapidly evolving sector. Thank you for considering my comments on this important matter. Sincerely, Bobby