Oct. 28, 2023
Dear SEC, I am writing as A Concerned U.S. Citizen to express my thoughts and concerns regarding the proposed rule "Safeguarding Advisory Client Assets." While I appreciate the aim of enhancing investor protections and addressing gaps in the custody rule, I have reservations about certain aspects of the proposed rule, particularly in relation to digital assets or cryptocurrencies, which are emerging as significant investment vehicles in today's financial landscape. The proposed rule expands the coverage to include a broader range of investments held in a client's account. This expansion raises questions about the specific challenges faced by exchanges in segregating client assets, especially when dealing with digital assets. Digital assets, such as cryptocurrencies, are built on blockchain technology, which offers unique features like decentralization and cryptographic security. However, the rapid pace of development in this field has resulted in regulatory uncertainties and challenges for traditional custodians. These challenges should be recognized and addressed in a nuanced manner within the proposed rule. While it is essential to safeguard client assets, it is equally crucial not to stifle innovation and hinder the growth of emerging technologies. The distinctive characteristics of digital assets cannot be easily fit into the traditional custodial framework. Demanding exchanges to segregate client assets for digital assets might pose significant operational challenges and potential risks for both clients and service providers. One particular issue is the application of the rule to crypto assets and the difficulty in demonstrating exclusive control over these assets. Unlike traditional assets, crypto assets are often held in digital wallets, which operate outside the scope of traditional custody arrangements. The proposed rule should provide clear guidance on how investment advisers can safely and effectively safeguard digital assets, considering the unique qualities and vulnerabilities of these assets. Furthermore, the burdensome paperwork reduction act requirements imposed by the proposed rule might impede competition and innovation in the crypto asset space. The estimated external cost burden of $322,956,000 for the exceptions relating to this asset class seems excessive and disproportionate to the nature of these investments. It is imperative to strike a balance between ensuring investor protections and fostering an environment conducive to innovation and growth in the digital asset industry. I commend the SEC's efforts to address investor protections and establish necessary regulatory oversight of client assets. However, I urge the commission to thoroughly assess the potential impact of the proposed rule on the regulatory framework surrounding digital assets. The comment period provides an opportunity to reflect on the unique challenges posed by digital assets and to craft effective regulations that can safeguard investor interests without stifling innovation. In conclusion, I respectfully request the SEC to consider the concerns raised regarding the burden on exchanges to segregate client assets, particularly in relation to digital assets. A thoughtful and inclusive approach to regulating digital assets will go a long way in ensuring the growth and resilience of the financial industry while safeguarding investor protections. Thank you for your attention to this matter. Sincerely, A Concerned U.S. Citizen