Oct. 30, 2023
Dear Securities and Exchange Commission, I am writing to provide my public comment on the proposed rule "Safeguarding Advisory Client Assets" as outlined by the SEC. While I understand the intention behind this rule, I have significant concerns regarding the unequal treatment of different types of digital assets and the potential regulatory arbitrage that may arise as a result. Digital assets, particularly cryptocurrencies, have revolutionized the financial landscape by leveraging blockchain technology to create decentralized and secure systems of transactions. However, the SEC's proposed rules seem to treat different types of digital assets inconsistently, causing confusion and uncertainty among industry participants. One of my main concerns is the lack of clear guidance on how different types of digital assets will be classified and regulated. For example, under the proposed rule, cryptocurrencies like Bitcoin and Ethereum are considered securities, while other tokenized assets may not fall under the same classification. This inconsistency creates a regulatory gray area and potentially allows for selective enforcement or unauthorized activities by participants seeking to take advantage of these inconsistencies. Furthermore, the proposed rule fails to adequately address the unique features and challenges associated with digital assets. Unlike traditional assets, custody of digital assets can be achieved through advanced cryptographic methods, known as self-custody. This method ensures that only the asset owner can access and transfer their digital assets, thereby reducing the risk of unauthorized transactions. However, the proposed rule does not fully recognize the benefits of self-custody and instead focuses primarily on qualified custodians as the sole means of safeguarding client assets. Additionally, the proposed rule makes it challenging to demonstrate exclusive control over digital assets, particularly those held on decentralized platforms. The decentralized nature of these platforms means that custody is distributed among multiple parties, making it difficult to meet the exclusive control requirement. This effectively prevents investment advisers from fully participating in the rapidly evolving digital asset market, limiting opportunities for investor exposure to this innovative asset class. I believe that in order to foster innovation and provide clarity in the evolving digital asset ecosystem, the SEC should consider revising the proposed rule to provide a consistent and comprehensive regulatory framework. This framework should acknowledge the unique characteristics of digital assets, differentiate between different types of digital assets, and provide guidance on custody methods beyond traditional qualified custodians. Moreover, the SEC should proactively engage with industry participants and stakeholders to gain a better understanding of the challenges and benefits associated with digital assets. By fostering a dialogue between regulators and market participants, the SEC can develop regulations that strike a balance between investor protection and fostering innovation in this rapidly evolving space. In conclusion, I urge the SEC to revisit the proposed rule with a specific focus on the treatment of digital assets. It is crucial to provide consistent and comprehensive regulations that support the growth and development of this transformative technology while ensuring investor protection. By doing so, the SEC will create an environment that encourages responsible market participation, fosters innovation, and bolsters investor confidence. Thank you for considering my comments. Regards, John