Oct. 30, 2023
Dear Securities and Exchange Commission, I am writing to offer my public comment on the proposal "Safeguarding Advisory Client Assets" (Release No. IA-5579; File No. S7-3-19) and raise concerns regarding certain aspects of the rule amendments. While I appreciate the SEC's efforts to enhance the safeguarding of client assets, I believe there are areas where the proposed rule may not adequately address the unique characteristics and challenges of digital assets, such as cryptocurrencies, and may inadvertently stifle innovation and growth in this rapidly evolving industry. Firstly, I would like to express my concern about the lack of industry expertise evident in the drafting of the proposed rule. The SEC's limited understanding of digital assets and cryptocurrencies is evident in some of the provisions, which fail to grasp the intricacies of this emerging technology. As a result, certain requirements and definitions in the rule may not align with the actual practices and considerations relevant to safeguarding digital assets. Digital assets, like cryptocurrencies, have been transforming the financial landscape, offering new opportunities for investors and businesses alike. However, the regulatory uncertainties surrounding digital assets pose significant challenges for market participants. It is essential for the SEC to embrace an informed and nuanced approach when crafting regulations in this space. One area of concern is the proposed rule's treatment of digital assets held by investment advisers as client assets. While the concept of safeguarding and ensuring the security of client assets is commendable, it is crucial to recognize the unique characteristics and custodial challenges presented by digital assets. The SEC's rigid inclusion of digital assets within the scope of the rule may inadvertently create burdensome requirements that are not practical or effective for ensuring the security of these assets. Moreover, the rule falls short in providing clear guidance on how investment advisers can demonstrate exclusive control over digital assets, a fundamental requirement for compliance with the custody rule. The complex nature of blockchain technology, which underpins cryptocurrencies, makes it challenging to apply traditional custody frameworks. The proposed rule should consider alternative approaches that account for the distributed and decentralized nature of digital asset storage while still addressing the need for investor protection. Additionally, the proposed rule's amendments to the surprise examination requirement may disproportionately burden advisers dealing with digital assets. The unique attributes of digital assets, such as the need for immediate access to private keys and encryption methods, present challenges to the implementation of surprise examinations. The rule should recognize the technological constraints and explore alternative methods of ensuring the security of digital assets held by investment advisers. Furthermore, the proposed changes to the Form ADV reporting requirements pertaining to digital assets need to be revised to avoid creating an excessive reporting burden. The SEC should take into account the potential scalability and complexity of digital asset holdings when assessing the necessary level of reporting, with the aim of striking a balance between investor protection and regulation that promotes market growth and innovation. In conclusion, while I appreciate the SEC's intention to enhance the safeguarding of client assets, it is important to address the concerns raised regarding the lack of industry expertise and understanding evident in the proposed rule. By taking a more nuanced approach to regulations surrounding digital assets and cryptocurrencies, the SEC can encourage innovation, protect investor interests, and ensure the United States remains a global leader in the dynamic and transformative digital asset industry. Thank you for considering my comments. They reflect my sincere belief in the need for a balanced regulatory framework that fosters growth while maintaining investor protection. Sincerely, Jonathan Kavanagh