Oct. 25, 2023
To whom it may concern at the Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule "Safeguarding Advisory Client Assets." While I understand the objective of enhancing investor protections and addressing gaps in the custody rule, I believe that certain aspects of the proposed rule may have a negative impact on the growth and development of decentralized finance (DeFi) and hinder innovation in the financial sector. One particular concern relates to the regulation of digital assets and cryptocurrencies. As we have witnessed, digital assets, built on blockchain technology, have the potential to transform the traditional financial landscape. They offer enhanced security, transparency, and efficiency in transactions. However, the rapid evolution and unique characteristics of digital assets pose challenges for regulatory frameworks. The proposed rule fails to provide clear guidelines and accommodations for digital assets or cryptocurrencies. These emerging technologies require a flexible regulatory approach that promotes innovation and allows for experimentation. By imposing strict custodial requirements without considering the differences between traditional and digital assets, the proposed rule risks hindering the growth of DeFi projects. Decentralized finance represents a new financial paradigm that empowers individuals and allows for greater financial inclusion. It enables individuals to access financial services without the need for intermediaries or traditional financial institutions. The proposed rule's emphasis on custodial requirements may deter individuals and entities from participating in DeFi projects due to compliance burdens. Furthermore, the proposed rule lacks specific provisions addressing the unique characteristics of digital assets. The nature of blockchain technology ensures that custody and control over digital assets are decentralized and distributed among a network of participants. This decentralized custody model, coupled with technological safeguards such as multi-signature wallets, helps protect assets effectively. Instead of imposing onerous custodial requirements for digital assets, regulators should focus on promoting industry best practices and standards for secure custody solutions. By fostering collaboration between industry participants, regulators can encourage the development of secure custodial solutions specifically tailored to the unique needs of digital assets. Additionally, I urge the SEC to consider the potential benefits of DeFi for financial inclusion. DeFi projects have the potential to provide financial services to underserved and unbanked populations worldwide. These projects leverage blockchain technology to remove barriers, such as stringent KYC requirements and access to traditional banking infrastructure. Rather than stifling innovation, regulators should work alongside industry participants to establish a comprehensive regulatory framework that facilitates the growth of DeFi projects while ensuring adequate investor protection. This can be achieved through proactive engagement, regulatory sandboxes, and regular assessment of the evolving DeFi landscape. In conclusion, I believe that the proposed rule "Safeguarding Advisory Client Assets" should be revised to account for the unique characteristics and potential of digital assets, particularly in the context of decentralized finance. Regulators have an opportunity to foster innovation, increase financial inclusion, and position the United States as a leader in the emerging field of digital assets. I encourage the SEC to seek industry input, collaborate with stakeholders, and adopt a balanced approach that protects investors while facilitating technological progress. Thank you for considering my concerns and for your continued dedication to ensuring the wellbeing of investors and the vibrancy of our financial markets. Sincerely, Jeffrey Kahn