Oct. 30, 2023
Dear Securities and Exchange Commission, I am writing to provide a public comment on the proposed rule "Safeguarding Advisory Client Assets." While I appreciate the SEC's efforts to enhance investor protections and address gaps in the custody rule, I have several concerns regarding the potential negative impacts of the proposed rule on token liquidity, especially in relation to digital assets like cryptocurrencies. Digital assets, built on blockchain technology, have transformed the financial landscape, offering new opportunities for investors. However, regulatory uncertainties surrounding these assets have impeded their widespread adoption. The proposed rule may further hinder token liquidity, making it more difficult for investors to buy and sell tokens. One of my concerns is the expansion of the rule's scope to include a broader range of investments held in a client's account. While I understand the importance of protecting investor assets, the inclusion of digital assets and cryptocurrencies within this expanded scope may create additional barriers for market participants. The unique nature of these assets necessitates a nuanced approach that promotes innovation while ensuring investor protection. Furthermore, I would like to address the challenges posed by demonstrating exclusive control over digital assets. Cryptocurrencies, by design, do not rely on traditional custodial arrangements. The proposed rule's requirement for exclusive control may not align with the decentralized nature of these assets, potentially limiting their inclusion within regulated investment products. It is crucial to strike a balance between safeguarding client assets and accommodating the distinct characteristics of digital assets to promote their healthy growth and provide investors with a broader range of investment options. Additionally, the proposed rule addresses how advisers can safeguard assets that cannot be maintained with a qualified custodian. While enhanced recordkeeping, separation of duties, and regular reviews are important, they should be implemented in a manner that does not unduly burden advisers or hinder their ability to engage with digital assets. Proportional and flexible requirements should be considered to avoid stifling innovation and excluding certain asset types. I also want to emphasize the importance of ensuring the segregation of client assets from adviser assets. This principle is crucial for investor protection. However, exceptions provided within the proposed rule should be carefully evaluated to ensure they do not compromise the overall goal of asset segregation. Transparent and strong safeguards must be in place to minimize the risk of commingling client and adviser assets. Furthermore, the proposed rule's amendments to the surprise examination requirements and the investment adviser recordkeeping rule are commendable in enhancing oversight and investor protection. However, when considering digital assets, the SEC should provide clear guidance on the recording and reporting of transactions involving these assets. Clarity in reporting requirements will facilitate compliance and regulatory oversight without stifling the industry's potential. It is also essential to emphasize the need for a reasonable transition period for advisers to comply with the new rule. Given the evolving nature of digital assets and their regulatory landscape, the SEC should provide sufficient time for market participants to adapt their practices while ensuring investor protection remains a priority. While the economic analysis accompanying the proposed rule highlights the benefits of enhancing investor protections and facilitating oversight, it is important to accurately assess the potential costs and weigh them against the benefits. The proposed rule's impact on token liquidity and digital asset markets should be carefully considered to avoid unintended consequences. In conclusion, while I support the SEC's intention to strengthen the safeguarding of client assets, I urge the Commission to carefully consider the potential negative impacts on token liquidity and the unique nature of digital assets. By promoting innovation and accommodating the distinct characteristics of digital assets within the proposed rule, the Commission can effectively enhance investor protections without hindering market growth. I appreciate the opportunity to provide my input and respectfully request that my concerns be taken into consideration. Thank you for your attention to this matter. Sincerely, Jon