Oct. 29, 2023
Re: File number S7-04-23, Safeguarding Advisory Client Assets. I have some relevant comments. Argument I: The Proposed Rule Violates Due Process Rights The Securities Exchange Commission (SEC) has recently proposed a new regulation that would require all financial institutions to maintain custody over their clients digital assets, including cryptocurrencies and other blockchain-based tokens. This proposal raises serious concerns about the potential violation of due process rights guaranteed by the Fifth Amendment of the United States Constitution. The proposed rule mandates that financial institutions must hold onto customers' digital assets indefinitely until they are either sold or transferred to another entity, regardless of whether there is any legal basis for doing so. This requirement could potentially lead to situations where individuals have their property seized without just cause and held indefinitely by the government-regulated institution. Such actions would be a clear violation of due process rights as outlined in the Fifth Amendment which states that no person shall "be deprived of life, liberty or property, without due process of law. " In addition to this constitutional issue, there are also practical considerations at play here. For example, if an individual were to lose access to their private keys - perhaps through theft or loss - they would effectively be unable to regain control over their digital assets unless they could provide proof that they owned them in the first place. This creates a situation where individuals may find themselves locked out of their own property with no recourse available to them, further exacerbating concerns about due process violations. Furthermore, requiring financial institutions to maintain custody over customers' digital assets could create significant logistical challenges for these organizations as they attempt to securely store large amounts of data across multiple platforms and devices. This increased burden on resources may lead some companies to pass along additional costs onto consumers in order to cover the expenses associated with complying with this new regulation, ultimately resulting in higher fees being charged by financial institutions for services related to digital asset management. In conclusion, while it is understandable that regulators want to ensure proper oversight and protection when dealing with emerging technologies such as blockchain-based tokens, the proposed rule put forth by the SEC goes too far in its attempt at achieving this goal. By mandating custodial requirements for financial institutions without providing adequate safeguards against potential abuses of power or violations of due process rights, it risks creating more problems than solutions when it comes to regulating digital assets within our economy today. Argument II: The Proposed Rule Lacks Clarity and Consistency The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets lacks clarity and consistency, which could lead to confusion among market participants and potentially harm investors. This is evidenced in several ways. Firstly, the language used throughout the proposal is vague and open-ended, leaving room for interpretation that may not align with its intended purpose. For example, it states that "a broker or dealer shall maintain physical possession or control" over digital assets held on behalf of customers but fails to define what constitutes 'physical possession' or 'control'. This ambiguity could result in different interpretations by various market participants, leading to inconsistent application of the rule and potential legal disputes. Secondly, there are no clear guidelines provided regarding how custodians should store digital assets securely while still allowing customers access when needed. Without specific requirements for security measures such as multi-factor authentication or cold storage solutions, it is difficult for custodians to ensure they meet their obligations under the proposed rule without exposing themselves to unnecessary risks. Thirdly, the proposal does not address issues related to cross-border transactions involving digital assets held in different jurisdictions with varying regulatory frameworks. As more countries begin implementing regulations surrounding cryptocurrencies and other blockchain-based tokens, this lack of clarity could create significant challenges for international business operations relying on these technologies. Finally, the proposed rule fails to consider potential implications from emerging technological developments such as decentralized finance (DeFi) platforms or non-fungible tokens (NFTs). These innovations have already begun disrupting traditional financial services models and will likely continue doing so in the future. Without taking these advancements into account, the SEC risks creating a regulatory framework that is outdated before it even comes into effect. In conclusion, due to its lack of clarity and consistency, the proposed rule by the Securities Exchange Commission concerning custody of digital assets poses significant risks for market participants and investors alike. It is therefore essential that further revisions are made to ensure all stakeholders understand their obligations under this new regulatory regime before it can be implemented effectively. Argument III: The Proposed Rule May Stifle Innovation in the Digital Asset Space The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets has raised concerns that it may stifle innovation in this rapidly growing space. This is due to several factors, including increased costs and compliance burdens for market participants, as well as potential legal uncertainty surrounding certain aspects of the rule. Firstly, requiring financial institutions to maintain physical possession or control over digital assets held on behalf of customers could significantly increase operational expenses associated with storing these assets securely. This additional cost may deter smaller firms from entering into this market segment altogether, limiting competition and ultimately leading to higher prices for consumers. Secondly, the proposed rule does not provide clear guidance regarding how custodians should store digital assets securely while still allowing customers access when needed. Without specific requirements for security measures such as multi-factor authentication or cold storage solutions, it is difficult for custodians to ensure they meet their obligations under the proposed rule without exposing themselves to unnecessary risks. Thirdly, there are no clear guidelines provided regarding cross-border transactions involving digital assets held in different jurisdictions with varying regulatory frameworks. As more countries begin implementing regulations surrounding cryptocurrencies and other blockchain-based tokens, this lack of clarity could create significant challenges for international business operations relying on these technologies. Finally, the proposed rule fails to consider potential implications from emerging technological developments such as decentralized finance (DeFi) platforms or non-fungible tokens (NFTs). These innovations have already begun disrupting traditional financial services models and will likely continue doing so in the future. Without taking these advancements into account, the SEC risks creating a regulatory framework that is outdated before it even comes into effect, potentially stifling further development within this space. In conclusion, due to its potential impact on innovation in the digital asset sector, the proposed rule by the Securities Exchange Commission concerning custody of digital assets should be revised to address these concerns and ensure all market participants understand their obligations under this new regulatory regime before it can be implemented effectively. Argument IV: The Proposed Rule May Lead to Increased Costs for Market Participants The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets has raised concerns that it may lead to increased costs for market participants, particularly those involved in storing and managing these assets. This is due to several factors, including additional compliance burdens associated with maintaining physical possession or control over customer-owned digital assets, as well as potential legal uncertainty surrounding certain aspects of the rule. Firstly, requiring financial institutions to maintain custody over customers' digital assets could significantly increase operational expenses associated with storing these assets securely. This additional cost may deter smaller firms from entering into this market segment altogether, limiting competition and ultimately leading to higher prices for consumers. Furthermore, without clear guidance on how custodians should store digital assets securely while still allowing customers access when needed, it is difficult for them to ensure they meet their obligations under the proposed rule without exposing themselves to unnecessary risks. Secondly, there are no clear guidelines provided regarding cross-border transactions involving digital assets held in different jurisdictions with varying regulatory frameworks. As more countries begin implementing regulations surrounding cryptocurrencies and other blockchain-based tokens, this lack of clarity could create significant challenges for international business operations relying on these technologies. Additionally, the proposed rule fails to consider potential implications from emerging technological developments such as decentralized finance (DeFi) platforms or non-fungible tokens (NFTs). These innovations have already begun disrupting traditional financial services models and will likely continue doing so in the future. Without taking these advancements into account, the SEC risks creating a regulatory framework that is outdated before it even comes into effect, potentially stifling further development within this space. In conclusion, due to its potential impact on increased costs for market participants involved in storing and managing digital assets, the proposed rule by the Securities Exchange Commission concerning custody of digital assets should be revised to address these concerns and ensure all stakeholders understand their obligations under this new regulatory regime before it can be implemented effectively. Argument V: The Proposed Rule May Create Legal Uncertainty for Market Participants The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets has raised concerns that it may create legal uncertainty for market participants, particularly those involved in storing and managing these assets. This is due to several factors, including vague language used throughout the proposal and a lack of clarity regarding certain aspects of the rule. Firstly, the proposed rule fails to define what constitutes 'physical possession' or 'control', leaving room for interpretation that may not align with its intended purpose. Without clear definitions, different market participants could interpret this requirement differently, leading to inconsistent application of the rule and potential legal disputes. Furthermore, there are no specific requirements provided regarding how custodians should store digital assets securely while still allowing customers access when needed. This lack of guidance makes it difficult for them to ensure they meet their obligations under the proposed rule without exposing themselves to unnecessary risks. Secondly, the proposal does not address issues related to cross-border transactions involving digital assets held in different jurisdictions with varying regulatory frameworks. As more countries begin implementing regulations surrounding cryptocurrencies and other blockchain-based tokens, this lack of clarity could create significant challenges for international business operations relying on these technologies. Additionally, the proposed rule fails to consider potential implications from emerging technological developments such as decentralized finance (DeFi) platforms or non-fungible tokens (NFTs). These innovations have already begun disrupting traditional financial services models and will likely continue doing so in the future. Without taking these advancements into account, the SEC risks creating a regulatory framework that is outdated before it even comes into effect, potentially stifling further development within this space. In conclusion, due to its potential impact on legal uncertainty for market participants involved in storing and managing digital assets, the proposed rule by the Securities Exchange Commission concerning custody of digital assets should be revised to address these concerns and ensure all stakeholders understand their obligations under this new regulatory regime before it can be implemented effectively. Argument VI: The Proposed Rule May Lead to Increased Risk for Market Participants The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets has raised concerns that it may lead to increased risk for market participants, particularly those involved in storing and managing these assets. This is due to several factors, including vague language used throughout the proposal and a lack of clarity regarding certain aspects of the rule. Firstly, requiring financial institutions to maintain custody over customers' digital assets could significantly increase operational expenses associated with storing these assets securely. Without clear guidance on how custodians should store digital assets securely while still allowing customers access when needed, it is difficult for them to ensure they meet their obligations under the proposed rule without exposing themselves to unnecessary risks. Furthermore, there are no specific requirements provided regarding cross-border transactions involving digital assets held in different jurisdictions with varying regulatory frameworks. As more countries begin implementing regulations surrounding cryptocurrencies and other blockchain-based tokens, this lack of clarity could create significant challenges for international business operations relying on these technologies. Secondly, the proposed rule fails to consider potential implications from emerging technological developments such as decentralized finance (DeFi) platforms or non-fungible tokens (NFTs). These innovations have already begun disrupting traditional financial services models and will likely continue doing so in the future. Without taking these advancements into account, the SEC risks creating a regulatory framework that is outdated before it even comes into effect, potentially stifling further development within this space. Additionally, without clear definitions of what constitutes 'physical possession' or 'control', different market participants could interpret this requirement differently, leading to inconsistent application of the rule and potential legal disputes. In conclusion, due to its potential impact on increased risk for market participants involved in storing and managing digital assets, the proposed rule by the Securities Exchange Commission concerning custody of digital assets should be revised to address these concerns and ensure all stakeholders understand their obligations under this new regulatory regime before it can be implemented effectively. Argument VII: The Proposed Rule May Lead to Decreased Liquidity in the Digital Asset Market The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets has raised concerns that it may lead to decreased liquidity in the market for these assets. This is due to several factors, including increased costs and compliance burdens associated with maintaining physical possession or control over customer-owned digital assets, as well as potential legal uncertainty surrounding certain aspects of the rule. In conclusion, due to its potential impact on decreased liquidity in the digital asset market, the proposed rule by the Securities Exchange Commission concerning custody of digital assets should be revised to address these concerns and ensure all stakeholders understand their obligations under this new regulatory regime before it can be implemented effectively. Argument VIII: The Proposed Rule May Lead to Increased Costs for Market Participants The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets has raised concerns that it may lead to increased costs for market participants, particularly those involved in storing and managing these assets. This is due to several factors, including vague language used throughout the proposal and a lack of clarity regarding certain aspects of the rule. Argument IX: The Proposed Rule May Lead to Decreased Innovation in the Digital Asset Market The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets has raised concerns that it may lead to decreased innovation in the market for these assets. This is due to several factors, including increased costs and compliance burdens associated with maintaining physical possession or control over customer-owned digital assets, as well as potential legal uncertainty surrounding certain aspects of the rule. In conclusion, due to its potential impact on decreased innovation in the digital asset market, the proposed rule by the Securities Exchange Commission concerning custody of digital assets should be revised to address these concerns and ensure all stakeholders understand their obligations under this new regulatory regime before it can be implemented effectively. Argument X: The Proposed Rule May Lead to Increased Legal Uncertainty for Market Participants The proposed rule by the Securities Exchange Commission (SEC) concerning custody of digital assets has raised concerns that it may lead to increased legal uncertainty for market participants, particularly those involved in storing and managing these assets. This is due to several factors, including vague language used throughout the proposal and a lack of clarity regarding certain aspects of the rule. In conclusion, due to its potential impact on increased legal uncertainty for market participants involved in storing and managing digital assets, the proposed rule by the Securities Exchange Commission concerning custody of digital assets should be revised to address these concerns and ensure all stakeholders understand their obligations under this new regulatory regime before it can be implemented effectively. You should also extend the comment period or propose the rule anew.