Oct. 28, 2023
I've got some comments on S7-04-23 Safeguarding Advisory Client Assets. The SEC has not provided sufficient evidence or data supporting its assertion that increased regulation is necessary to protect consumers from fraudulent practices related to cryptocurrency custody services. Without such justification, it becomes difficult for stakeholders to understand why these new rules are needed at all. The proposed rule could potentially stifle innovation in the cryptocurrency industry by creating unnecessary barriers to entry for new players, particularly those offering novel custody solutions that do not fit within traditional regulatory frameworks. This could ultimately harm consumers who stand to benefit from increased competition and choice in this rapidly evolving market. There are concerns about potential conflicts of interest arising from the SEC's dual role as both regulator and enforcer in this space. This could create an environment where the agency prioritizes its own interests over those of market participants or investors. The SEC's authority over cryptocurrency custody is unclear due to the lack of clear jurisdictional boundaries between federal agencies like the CFTC, FinCEN, and state-level regulators such as money transmitter laws. This ambiguity could lead to inconsistent enforcement actions across different states or regions. The proposed rule does not provide sufficient guidance on how custodians should handle private keys associated with digital assets under their control. Without clear guidelines, there is a risk that these sensitive pieces of information may fall into the wrong hands and be used for malicious purposes. The SEC's proposed rule may create a competitive disadvantage for U. S. -based cryptocurrency businesses compared to their international counterparts, as other countries have taken more progressive approaches towards regulating digital assets custody services. This could lead to capital flight and reduced investment in the domestic market, ultimately harming American consumers and entrepreneurs alike There is a lack of clarity regarding the applicability of existing tax laws (such as capital gains taxes) to cryptocurrency holdings under custodial arrangements. This uncertainty could create confusion among investors and lead to unintended consequences, such as double taxation or inadvertent non-compliance with reporting requirements The SEC's proposed rule does not provide sufficient guidance on how custodians should handle disputes between customers regarding ownership of digital assets under their control. Without clear guidelines, there is a risk that these situations may result in lengthy and costly legal battles, ultimately harming both parties involved as well as the overall reputation of the industry There is a lack of clarity regarding the applicability of existing consumer protection laws (such as anti-money laundering regulations) to digital assets held by custodians under the proposed rule. This uncertainty may deter innovation and investment in this rapidly evolving sector, while also potentially exposing consumers to increased risks related to fraud or other illicit activities. The SEC's proposed rule may create a competitive disadvantage for U. S. -based cryptocurrency businesses compared to their international counterparts, as other countries have taken more progressive approaches towards regulating digital assets custody services. This could lead to capital flight and reduced investment in the domestic market, ultimately harming American consumers and entrepreneurs alike. The proposed rule is overly broad and could potentially capture many activities that do not involve actual custodial services, leading to unnecessary compliance burdens for market participants who are not engaged in such activities. There is a lack of clarity regarding the applicability of existing securities laws (such as registration requirements) to digital assets held by custodians under the proposed rule. This uncertainty may deter innovation and investment in this rapidly evolving sector. Finally, the proposed rule fails to take into account the unique characteristics of blockchain technology and decentralized systems, which could lead to unintended consequences or ineffective enforcement efforts down the line. For example, imposing traditional custodial requirements on non-custodial platforms like peer-to-peer exchanges may not be feasible or appropriate given their inherent design features and operational models. Finally, the proposed rule fails to take into account the unique characteristics of blockchain technology and decentralized systems, which could lead to unintended consequences or ineffective enforcement efforts down the line. For example, imposing traditional custodial requirements on non-custodial platforms like peer-to-peer exchanges may not be feasible or appropriate given their inherent design features and operational models The proposed rule fails to address issues related to cross-border transactions involving cryptocurrencies, which are becoming increasingly common due to globalization and advancements in technology. Without proper oversight, these types of activities could facilitate money laundering or other illicit financial activity. The SEC's proposed rule does not provide sufficient guidance on how custodians should handle forks or airdrops of new digital assets associated with existing holdings under their control. Without clear guidelines, there is a risk that these events may result in unintended consequences, such as unexpected tax liabilities or loss of ownership rights over the newly created tokens. The SEC's proposed rule may create a competitive disadvantage for U. S. -based cryptocurrency businesses compared to their international counterparts, as other countries have taken more progressive approaches towards regulating digital assets custody services. The proposed rule could potentially stifle innovation in the cryptocurrency industry by creating unnecessary barriers to entry for new players, particularly those offering novel custody solutions that do not fit within traditional regulatory frameworks. This could ultimately harm consumers who stand to benefit from increased competition and choice in this rapidly evolving market The proposed rule fails to address issues related to insurance coverage for cryptocurrency holdings under custodial arrangements. Without adequate protection against potential losses due to hacking or other security breaches, customers may be hesitant to entrust their digital assets with third-party service providers. The SEC's proposed rule does not provide sufficient guidance on how custodians should handle disputes between customers regarding ownership of digital assets under their control. Without clear guidelines, there is a risk that these situations may result in lengthy and costly legal battles, ultimately harming both parties involved as well as the overall reputation of the industry. The proposed rule fails to address issues related to smart contracts and other self-executing code used in connection with cryptocurrency custody services. Without proper oversight, this technology could be exploited for fraudulent purposes or lead to unintended consequences due to coding errors or malicious actors manipulating the underlying logic of these systems There is a lack of clarity regarding the applicability of existing consumer protection laws (such as anti-money laundering regulations) to digital assets held by custodians under the proposed rule. This uncertainty may deter innovation and investment in this rapidly evolving sector, while also potentially exposing consumers to increased risks related to fraud or other illicit activities The proposed rule fails to address issues related to insurance coverage for cryptocurrency holdings under custodial arrangements. Without adequate protection against potential losses due to hacking or other security breaches, customers may be hesitant to entrust their digital assets with third-party service providers The SEC's proposed rule does not provide sufficient guidance on how custodians should handle forks or airdrops of new digital assets associated with existing holdings under their control. Without clear guidelines, there is a risk that these events may result in unintended consequences, such as unexpected tax liabilities or loss of ownership rights over the newly created tokens There is a lack of clarity regarding the applicability of existing tax laws (such as capital gains taxes) to cryptocurrency holdings under custodial arrangements. This uncertainty could create confusion among investors and lead to unintended consequences, such as double taxation or inadvertent non-compliance with reporting requirements. The proposed rule fails to address issues related to smart contracts and other self-executing code used in connection with cryptocurrency custody services. Without proper oversight, this technology could be exploited for fraudulent purposes or lead to unintended consequences due to coding errors or malicious actors manipulating the underlying logic of these systems. The definition of "custody" under the proposed rule may be too narrow or vague, failing to adequately address all forms of digital asset storage and management. This could create gaps in regulatory oversight and leave certain types of crypto assets vulnerable to fraudulent practices. In compliance with the APA, please evaluate my relevant and substantive comments.