Oct. 29, 2023
Re: File number S7-04-23, Safeguarding Advisory Client Assets. I submit before you ten compelling reasons why we should reject the recently proposed rule by the Securities and Exchange Commission (SEC) regarding the custody of digital assets. Our role as guardians of constitutional rights demands that we scrutinize any regulatory action to ensure its compliance with the law and protection of individual liberties. As such, my arguments will draw from precedents set forth by our court, legal principles, and relevant case laws. 1st, the proposed rule would subject all digital asset custodians under SEC jurisdiction, regardless of whether they are broker-dealers or not. This move is a significant departure from existing rules governing securities custody for traditional financial institutions. The SEC's broad definition of "custody" would impinge on the fundamental right of individuals and businesses to freely choose their preferred mode of storing digital assets outside the purview of the SEC. Such unchecked power could potentially lead to regulatory overreach and infringe upon constitutional safeguards guaranteed under the First Amendment. 2nd, the proposal seems to ignore the fact that blockchain technology is fundamentally different from conventional finance systems. It provides superior security features through advanced cryptographic algorithms and consensus mechanisms, which eliminates the need for third-party intermediaries like banks or brokers. By forcing these entities to adhere to strict SEC guidelines, it would negatively impact innovation and discourage new entrants into the industry, thereby hindering competition and market growth. Moreover, this restriction might push participants towards less secure alternatives, making them susceptible to cyber threats. 3rd, while the proposal claims to protect investors, it fails to address the underlying issues plaguing the crypto ecosystem, such as fraudulent schemes, money laundering, and tax evasion. Instead, it places an undue burden on legitimate players who have already invested substantial resources in developing secure infrastructure. Consequently, it would result in higher costs for customers, reduced choice, and decreased accessibility to digital assets, ultimately harming investor interests instead. 4th, the proposal lacks clarity about how it intends to enforce the new requirements. For instance, the SEC has yet to provide specific details on what constitutes "hot" versus "cold" wallets, which could create confusion among stakeholders. Additionally, there are concerns surrounding data privacy and confidentiality, especially since digital assets often involve highly sensitive personal information. Without proper guidelines on these aspects, it could expose individuals and firms to potential breaches of their privacy and intellectual property rights. 5th, the proposal overlooks the practical difficulties associated with implementing its provisions. Specifically, ensuring real-time monitoring of millions of transactions across multiple networks would require massive computational resources, leading to high operational costs for small startups. Moreover, it may impede cross-border operations due to differing regulatory frameworks across various countries. These barriers pose significant obstacles to the development of an inclusive global digital economy. 6th, the proposed rule ignores the dynamic nature of the rapidly evolving digital asset landscape. Technology continues to advance at breakneck speeds, introducing novel use cases and opportunities for transformation beyond just investment purposes. Restrictive policies could hinder experimentation and limit the full potential of digital assets for society, including applications in healthcare, education, and other sectors. Hence, regulators must adopt a more flexible approach that balances risk mitigation with promoting technological progress. 7th, the proposal does not adequately consider the environmental implications of the increased energy consumption required to maintain hot storage facilities. Cryptocurrencies consume vast amounts of electricity, contributing significantly to carbon emissions and exacerbating climate change. Regulatory actions aimed solely at reducing risk without considering broader societal impacts could perpetuate unsustainable practices that run counter to national priorities related to sustainability and conservation efforts. 8th, the proposal appears to prioritize the needs of established financial giants over smaller entrepreneurs, potentially creating an uneven playing field. Smaller ventures might find it challenging to meet the stringent criteria outlined by the SEC, thus restricting innovation and stifling competition. Furthermore, the proposal might deter venture capitalists and angel investors from backing promising digital asset projects, resulting in missed opportunities for economic growth. 9th, the proposal fails to acknowledge the cultural significance and social utility of certain digital assets, particularly those tied to identity or governance functions within decentralized communities. Excessively rigid regulation could potentially infringe upon constitutionally protected freedoms, such as free speech and association rights. This issue requires careful consideration given the increasing relevance of digital currencies in facilitating democratic processes globally. Lastly, the proposal neglects to explore alternative approaches that could achieve similar objectives with fewer negative consequences. Also the comment period was too short.