Oct. 31, 2023
Dear Securities and Exchange Commission, I am writing to express my serious concerns regarding the proposed rule on "Safeguarding Advisory Client Assets." While I appreciate the SEC's objective of enhancing investor protections and addressing gaps in the custody rule, I believe that certain aspects of the proposal require further consideration, particularly with regards to the unique properties and complexities of the cryptocurrency market. As the financial landscape evolves, digital assets such as cryptocurrency have emerged as a new and promising asset class. These assets, built on innovative blockchain technology, have the potential to transform the way we conduct financial transactions and invest. However, the SEC's proposed rule fails to adequately consider the decentralized nature and technological intricacies of cryptocurrency, resulting in regulatory requirements that may pose unnecessary burdens and hinder the growth of this industry. The proposed expansion of coverage to include a broader range of investments held in a client's account is a valid objective. However, applying the same requirements to cryptocurrency without considering its unique characteristics may have unintended consequences. Cryptocurrency operates on decentralized networks, enabling peer-to-peer transactions and eliminating the need for intermediaries. Therefore, alternative approaches should be explored that align with the decentralized nature of these assets, while still ensuring investor protection and regulatory compliance. In addition, the proposed rule fails to provide clear guidance on how investment advisers can demonstrate exclusive control over cryptocurrency assets. The decentralized nature of blockchain technology challenges traditional notions of custody, and it is imperative for regulators to develop a clear framework that accommodates this innovative technology. A collaborative approach involving experts from both the regulatory and cryptocurrency sectors can help establish practical and effective solutions that strike a balance between asset safety and regulatory clarity. Furthermore, the rule's requirements for safeguarding assets that cannot be maintained with a qualified custodian necessitate careful consideration within the context of cryptocurrency. Enhanced recordkeeping, separation of duties, and regular reviews are important safeguards, but they must also align with the technological intricacies and security measures associated with cryptocurrency. Collaboration between regulators, investment advisers, and technology experts can help ensure that these requirements are implemented in a manner that prioritize the security of client assets and foster technological advancements. Moreover, while the principle of segregating client assets from adviser assets is essential for investor protection, it is vital to recognize the benefits that blockchain technology offers in terms of transparency and immutability. Leveraging these features can establish a reliable and auditable system, reducing the need for overly burdensome segregation requirements. It is important that the SEC takes into account these technological advancements and explores ways to align them with regulatory objectives for safeguarding client assets. Additionally, I am concerned about the potential economic impacts and compliance costs associated with the proposed rule. The cryptocurrency market is experiencing significant growth and adoption, and overly burdensome regulatory requirements may impede this progress. It is crucial to strike a balance between protecting investors and fostering innovation, to ensure that cryptocurrency can reach its full potential in driving economic growth. In conclusion, while I support the SEC's objective of enhancing safeguards for advisory client assets, I urge you to consider the unique properties and complexities of cryptocurrency when formulating regulatory requirements. A regulatory framework that acknowledges the innovations brought by blockchain technology and encourages its responsible use will foster a thriving and resilient financial ecosystem. Collaboration with stakeholders in the cryptocurrency industry, including technologists and practitioners, is crucial for developing effective and practical regulatory measures. Thank you for considering my concerns. I hope that my comments contribute to a thoughtful and comprehensive discussion surrounding the proposed rule on safeguarding client assets. Sincerely, Andre Sustic