Oct. 26, 2023
Good Afternoon, The SEC’s willingness to reopen the comment period is greatly appreciated. It offers an opportunity to establish a forum that can ideally help bridge the gap between innovation and regulatory frameworks. The SEC’s proposed Custody Rule changes, though well-intentioned, could inadvertently dampen American innovation in the crypto space. Excessive regulation risks driving the next generation of technology overseas at a time when global crypto leadership should belong to the USA. Hindering innovation would be harmful to large firms, small businesses, and retail participants alike, weakening US capital markets. The proposed rule poses a risk to the security of personal data and information. Requiring vast amounts of sensitive data to be stored by numerous third parties within the crypto space, without adequate safeguards, elevates the potential for data breaches and financial harm to all participants . This scenario fosters an environment where malicious actors can exploit vulnerabilities under the pretext of compliance. And despite their technical prowess and ample resources, even the most capable companies can falter, as demonstrated by Facebook and other data breaches. Imposing surprise custody examinations and qualified custodian requirements on all crypto asset service providers may go beyond the SEC's jurisdiction as well. As noted in the 2018 Hinman speech, crypto assets like Bitcoin and Ethereum have been determined not to be securities due to their decentralization. Federal court decisions like SEC v. Ripple Labs finding XRP not a security, demonstrates the SEC lacks legal authority to regulate non-security crypto assets in this manner. Forcing unnecessary regulations on non-security digital assets raises constitutional concerns, infringing on states' rights under the Tenth Amendment to regulate property transactions within their borders and even the First Amendment as seen in Bernstein v. United States (1999). Blockchains transcend mere financial considerations. They represent a platform for the exchange of thoughts, speech, artistic expression, and innovative ideas. As such, they shouldn't be subject to the same regulatory guidelines as conventional financial instruments. The SEC has been slow to cooperate regarding much-needed guidance in crypto markets. Imposing more complex rules without consensus will only lead to more confusion, spark unnecessary litigation, and further waste regulatory resources. The proposed rule not only threatens to stifle innovation but also poses a regulatory challenge for the SEC. Given the broad and undefined scope of these regulations, significant volumes of blockchain data publication could inadvertently trigger SEC reviews, rendering the enforcement process impractical or outright impossible. This could result in an enforcement approach that is both legally questionable and unfairly punitive. In summary, these burdensome and legally uncertain requirements will further limit retail access to digital asset products and drive talent away from the US. This directly conflicts with the SEC's mission. The SEC should collaborate with the crypto industry to find solutions that provide necessary investor protections where applicable, while enabling continued US leadership. Imposing unilateral regulations on non-securities will only hurt American innovation. Best Regards