Oct. 23, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the "Safeguarding Advisory Client Assets" proposal. While I recognize the importance of enhancing investor protections and addressing gaps in the custody rule, I believe that certain aspects of the proposed rule lack clarity, particularly in relation to the definition of digital assets. The proposed rule aims to expand the coverage of investments held in a client's account, which is commendable. However, it is crucial for the SEC to provide clear guidance on what constitutes a digital asset. With the rise of digital currencies and advancements in blockchain technology, digital assets like cryptocurrencies have become an integral part of the financial landscape. Unfortunately, the proposal does not provide explicit definitions or guidelines for digital assets, leading to confusion and potential misinterpretation. Without clear definitions, investment advisers may struggle to understand how to properly safeguard digital assets within the framework of the proposed rule. This lack of clarity could hinder the adoption and development of innovative investment strategies involving digital assets, ultimately impeding the growth of the advisory industry. Moreover, the proposal acknowledges the challenges in demonstrating exclusive control over digital assets. While the intention is to enhance the protection of client assets, it is vital that the SEC develops a comprehensive framework that addresses the unique characteristics of digital assets. This framework should provide clear requirements and guidelines for establishing exclusive control over digital assets to mitigate the risk of loss or misappropriation. Additionally, the proposed rule highlights the need for enhanced recordkeeping, separation of duties, and regular reviews for assets that cannot be maintained with a qualified custodian. In the case of digital assets, which can often be held securely on decentralized networks, the SEC should consider leveraging technology and innovation to develop alternative approaches for safeguarding these assets. Embracing new solutions, such as cryptographic protocols or third-party auditors specializing in digital asset security, can provide the necessary assurances without stifling technological advancements. Furthermore, the proposal raises concerns regarding the impact on small advisers, particularly those dealing with digital assets. The cost of compliance and the burden of reporting and recordkeeping requirements could disproportionately affect smaller firms, hindering their ability to participate in the digital asset market. It is essential for the SEC to conduct a thorough analysis of the economic effects of the proposed rule on both large and small advisers to ensure a level playing field and market access for all. In conclusion, I urge the SEC to address the lack of clarity surrounding the definition of digital assets in the proposed rule. By providing clear guidance and leveraging innovative solutions, the SEC can enhance investor protection while fostering a conducive environment for the growth and development of the digital asset market. Additionally, it is crucial to consider the potential impact on small advisers, ensuring that the proposed rule does not impede their ability to participate in this emerging sector. Thank you for considering my input. I appreciate the opportunity to provide a public comment on this important matter. Sincerely, Chris Hands