Oct. 29, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule on Safeguarding Advisory Client Assets. While I appreciate the intentions stated in the proposal to enhance investor protections and address gaps in the current custody rule, I believe there are several areas where the rule falls short, particularly in its inadequate consideration of the unique properties of cryptocurrency. Digital assets, such as cryptocurrencies, are transforming the financial landscape, offering new opportunities for innovation and investment. However, the regulatory environment surrounding these assets remains uncertain. It is crucial that any rules governing digital assets are grounded in a deep understanding of their decentralized nature and technological complexities. Unfortunately, the proposed rule does not sufficiently address these factors, leading to impractical and burdensome regulatory requirements. One of the key issues concerning the proposed rule is its application to crypto assets held by investment advisors. The rule imposes the same requirements and standards on crypto assets as it does on traditional securities, disregarding the fundamental differences between the two. The decentralized nature of cryptocurrency means that exclusive control, as defined in the rule, is not easily demonstrated. This creates challenges for investment advisors in complying with the requirement to show proper custody of client assets. Additionally, the proposed rule fails to acknowledge the existing frameworks and industry best practices for the safeguarding of crypto assets. The crypto industry has made significant strides in establishing security protocols and technical safeguards to protect digital assets. Instead of recognizing and leveraging these efforts, the rule seeks to impose a one-size-fits-all approach that undermines the progress made in the digital asset space. Moreover, the rule places undue emphasis on the use of qualified custodians for the storage of client assets. While custodian arrangements can provide an additional layer of security, they might not always be practical or in the best interest of clients when dealing with digital assets. Restricting the use of alternative storage solutions prevents investment advisors from adopting innovative and secure methods of safeguarding client assets. Furthermore, the proposed amendments to the Surprise Examination Requirement pose significant challenges for investment advisors managing crypto assets. The requirement to establish a written agreement with an independent public accountant could impose a disproportionate burden on investment advisors due to the unique complexities of verifying the ownership and control of crypto assets. In conclusion, I urge the Securities and Exchange Commission to reevaluate the proposed rule on Safeguarding Advisory Client Assets, particularly in relation to its inadequate consideration of the unique properties of cryptocurrency. It is essential that any regulations in this space are carefully crafted to ensure the protection of investors while facilitating innovation and growth in the digital asset industry. I encourage the SEC to collaborate with industry experts, technologists, and stakeholders to develop more nuanced and effective regulatory frameworks for digital assets. Thank you for considering my comments on this important matter. Sincerely, Stu