Oct. 28, 2023
Dear Sir or Madam, I am writing to provide my public comment on the proposed rule "Safeguarding Advisory Client Assets" by the Securities and Exchange Commission (SEC). As a concerned U.S. citizen, I appreciate the SEC's effort to enhance investor protections and address gaps in the custody rule. However, I have some concerns and issues regarding the proposal, particularly in relation to the inadequate consideration of oracles for the custody and verification of digital assets. I. Introduction The proposed rule aims to enhance investor protections and address gaps in the custody rule. It includes amendments to the current rule, recordkeeping, and registration requirements. While I acknowledge the importance of safeguarding client assets, it is crucial to consider the unique challenges posed by the rising prominence of digital assets and cryptocurrencies. II. Discussion A. Scope of Rule The proposed rule expands the coverage to include a broader range of investments held in a client's account. However, it lacks sufficient consideration of the role of oracles in the custody and verification of digital assets. Oracles, which are trusted sources of external data, play a vital role in ensuring the accuracy and reliability of information regarding digital asset transactions. Not adequately addressing the role of oracles in the proposed rule could lead to regulatory challenges and hinder the effective safeguarding of digital assets. B. Qualified Custodian Protections The rule discusses the application of the custodian rule to crypto-assets, acknowledging their relevance in the current financial landscape. However, it does not provide clear guidelines on how investment advisers can effectively demonstrate exclusive control over digital assets. Addressing this concern is crucial to ensure the robust protection of client assets and prevent potential fraudulent activities. C. Certain Assets Unable to be Maintained with a Qualified Custodian The proposed rule addresses how advisers can safeguard assets that cannot be maintained with a qualified custodian. While the rule includes enhanced recordkeeping, separation of duties, and regular reviews, it fails to explicitly consider the role of oracles in verifying the custody and ownership of digital assets. By acknowledging the importance of oracles in this context, the proposed rule can provide comprehensive safeguards for all forms of assets, including digital assets. D. Segregation of Client Assets The rule rightly aims to ensure the segregation of client assets from the adviser's assets. However, it is essential to recognize that the unique characteristics of digital assets require specific considerations in terms of segregation. By explicitly incorporating these considerations in the proposed rule, the SEC can enhance the protection of client assets in an evolving market. E. Investment Adviser Delivery of Notice to Clients The requirement for advisers to notify clients in writing when opening an account with a custodian is commendable. However, the notice should also include information on how digital assets are custody and verified, utilizing oracles where applicable. This additional information would provide particular transparency and assurance to clients and align with the unique demands of digital asset transactions. III. Economic Analysis While the economic analysis presented in the proposal is informative, it must adequately account for the potential benefits and costs associated with the integration of oracles in the custody and verification of digital assets. Without proper consideration of these factors, the economic analysis may fall short in capturing the full extent of the impact on investment advisers and investors. IV. Paperwork Reduction Act Analysis The proposed rule includes new collection of information requirements to facilitate the enhanced safeguarding of client assets. However, it does not explicitly address the collection, use, and confidential handling of data pertaining to digital assets. As the use of digital assets continues to grow, it is crucial for the SEC to establish clear guidelines on how these assets will be handled in accordance with the Paperwork Reduction Act. V. Initial Regulatory Flexibility Analysis In the proposed rule, I recommend the SEC consider the unique circumstances faced by small entities operating within the digital asset space. This includes providing clear guidance on oracles' role in safeguarding client assets and considering potential additional compliance costs that small entities may bear to implement comprehensive custody and verification systems. VI. Consideration of Impact on the Economy The proposed rule and amendments have a direct impact on the economy by enhancing investor protections and SEC oversight. It is essential to acknowledge that the economy is increasingly being shaped by digital assets and cryptocurrencies, and the regulatory framework should adapt accordingly. By addressing the concerns raised regarding the role of oracles, the proposed rule can contribute to a more efficient and secure financial ecosystem. VII. Statutory Authority The proposed rule and amendments fall under the statutory authority provided by various sections of the Advisers Act. To effectively address the challenges posed by digital assets, it is important for the SEC to utilize this authority to consider the role of oracles in verifying custody and ownership, providing a strong regulatory framework that aligns with technological advancements. In conclusion, I urge the SEC to give due consideration to the role of oracles in the custody and verification of digital assets. By incorporating clear guidelines and requirements regarding their use, the proposed rule can comprehensively address the unique challenges posed by digital assets and enhance the safeguarding of client assets. This will contribute to a more secure and transparent financial environment for both investment advisers and investors. Thank you for considering my comments on the Safeguarding Advisory Client Assets proposal. I trust that my concerns will be taken into account as the SEC reviews and finalizes the rule. Sincerely, A Concerned U.S. Citizen