Oct. 25, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule "Safeguarding Advisory Client Assets" and its potential negative impact on decentralized finance (DeFi) and digital assets. While I understand the need for investor protection and the importance of safeguarding client assets, I believe it is crucial to also consider the potential implications these rules may have on innovation and financial inclusion. Firstly, the proposed rule's application to digital assets, particularly cryptocurrencies, raises concerns. Digital assets have emerged as a transformative force in the financial industry, leveraging blockchain technology to enhance security, transparency, and efficiency. However, the regulatory landscape surrounding digital assets remains unclear, causing uncertainty and stifling innovation. The inclusion of digital assets within the scope of this rule further adds complexity and raises questions about the feasibility of compliance within the rapidly evolving DeFi ecosystem. Digital assets, such as cryptocurrencies, are characterized by decentralized networks without traditional custodial relationships. They rely on smart contracts and consensus mechanisms for the secure transfer of assets, eliminating the need for traditional intermediaries. By subjecting digital assets to custodial requirements, this rule risks stifling innovation in the DeFi space and limiting the potential for financial inclusion. The DeFi ecosystem thrives on openness, accessibility, and decentralized decision-making. Imposing stringent custodial requirements may discourage innovators from entering the market, hindering the development of decentralized financial solutions that have the potential to serve underserved populations and disrupt traditional financial models. Furthermore, the challenges outlined in this proposal in demonstrating exclusive control over digital assets highlight the need for a nuanced approach to regulation. The nature of digital assets, built on decentralized networks, presents unique custody challenges that do not align neatly with traditional custodial models. Imposing the same requirements on digital assets as those applied to traditional assets may be impractical and hinder the growth of this emerging sector. Instead, regulators should consider cooperative approaches that engage industry stakeholders to develop innovative solutions specific to the unique characteristics of digital assets. It is important to strike a balance between investor protection and fostering innovation and financial inclusion. While the SEC's goal to enhance investor protections is commendable, it is crucial to avoid stifling emerging technologies and discouraging the development of decentralized financial solutions. Instead of approaching digital asset regulation solely through a custodial lens, regulators should adopt a flexible and adaptable framework that promotes innovation while mitigating risks. I encourage the SEC to consider alternative approaches that promote regulatory clarity, flexible oversight mechanisms, and constructive dialogue with industry participants. It is crucial to engage stakeholders across the DeFi ecosystem, including technologists, developers, and industry experts, to collectively develop an effective regulatory framework that preserves investor protection while nurturing innovation and financial inclusion. In conclusion, the proposed rule's application to digital assets, particularly cryptocurrencies, raises concerns about the potential stifling of innovation and inhibiting the growth of decentralized finance. I urge the SEC to consider the unique characteristics of digital assets when formulating regulations, adopting an approach that balances investor protection with fostering innovation and financial inclusion. Engaging industry stakeholders and fostering dialogue will be crucial in developing a flexible and adaptive regulatory framework that meets the needs of a rapidly evolving digital asset landscape. Thank you for considering my comments. Sincerely, Ana Herrera