Oct. 23, 2023
Dear Securities and Exchange Commission, I am writing to submit my public comment on the proposed rule "Safeguarding Advisory Client Assets" (File Number S7-30-18) that aims to enhance investor protections and address gaps in the custody rule for investment advisers. While I appreciate the SEC's efforts to safeguard client assets, I have some concerns regarding the unequal treatment of different types of digital assets and the potential regulatory arbitrage it may create. The proposed rule includes amendments to the current custody rule to address the safeguarding of a broader range of investments held in a client's account. While this expansion is admirable, I believe that the rule lacks clarity in its treatment of different types of digital assets. Digital assets, such as cryptocurrencies, have emerged as a transformative force in the financial industry, leveraging blockchain technology to provide innovative and decentralized financial solutions. However, the SEC's proposed rules fail to provide consistent treatment for different types of digital assets, leading to confusion and potential regulatory arbitrage. Inconsistency in treating different types of digital assets undermines investor confidence and stifles innovation in this space. Imposing stringent custody requirements on some digital assets while exempting others creates an uneven playing field and potentially disadvantages certain innovation-driven projects. To promote consistency and clarity, the SEC should consider providing clear guidelines for custody requirements that encompass all digital assets, rather than treating them inconsistently based on their classification. Furthermore, the proposed rule acknowledges the challenges in demonstrating exclusive control over crypto assets. Given the unique nature of digital assets, exclusive control can be challenging to establish, and traditional custody models may not be best suited to accommodate their decentralized and distributed nature. The SEC should proactively collaborate with industry stakeholders to develop innovative custody solutions specific to digital assets, ensuring that investor protections are maintained while encouraging continued growth and development of this promising space. Additionally, the proposed rule addresses how advisers can safeguard assets that cannot be maintained with a qualified custodian by requiring enhanced recordkeeping, separation of duties, and regular reviews. While these measures are necessary, it is important to strike a balance between safeguarding client assets and facilitating the growth and adoption of certain digital assets that may not fit within the traditional custodial framework. The SEC should consider exploring alternative custody options and developing appropriate oversight mechanisms that cater specifically to digital assets, ensuring equal treatment and fostering innovation. Moreover, the proposed rule emphasizes the segregation of client assets from the adviser's assets. While this is a commendable objective, it is essential that exceptions to this requirement are carefully considered and justified. An overly restrictive application of the segregation requirement may increase compliance costs for investment advisers without necessarily providing commensurate benefits to client protection. The SEC should undertake a thorough assessment of the proposed exceptions to ensure that they align with the objective of safeguarding client assets while not unduly burdening investment advisers. In conclusion, I urge the SEC to review and reconsider the treatment of different types of digital assets in the proposed rule. The inconsistencies in treatment create confusion and potential regulatory arbitrage, hindering innovation and investment in this space. By providing clear guidelines and collaborating with industry stakeholders, the SEC can foster a regulatory environment that promotes investor protection while supporting the growth and development of digital assets. I appreciate the opportunity to provide input and recommend that the SEC incorporates these concerns into the final rule. Sincerely, Tim