Nov. 1, 2023
I am writing to express my concerns regarding the proposed rule "Safeguarding Advisory Client Assets." While the intention of this rule to enhance investor protections and address gaps in the custody rule is commendable, there are certain aspects that require further consideration. One area of concern is the proposed rule's impact on investor access to digital assets, particularly cryptocurrencies. The rule expands the coverage to include a broader range of investments held in a client's account without taking into account the unique characteristics of digital assets. These assets, built on blockchain technology, have been transformative in the finance industry, offering new opportunities for investors. However, regulatory uncertainties surrounding digital assets already pose challenges to their widespread acceptance. By imposing additional requirements and restrictions on digital assets, the proposed rule may inadvertently restrict investor access to this emerging asset class. This could limit their ability to participate in the potential growth and diversification opportunities offered by digital assets, ultimately hindering their ability to maximize their investment returns. Moreover, the proposed rule's approach to demonstrating exclusive control over digital assets is problematic. Digital assets exist in a decentralized network and inherently require certain technical controls in order to operate securely. Requiring investment advisers to demonstrate exclusive control over these assets may not align with the existing decentralized structure and technical limitations posed by digital assets, making compliance with this requirement arduous and impractical. Additionally, the proposed rule's enhancement of protections for client assets held by qualified custodians must be carefully considered when it comes to digital assets. Digital assets are often stored in digital wallets or on exchanges, which may not fit the definition of a traditional qualified custodian. Mandating all digital assets to be held by qualified custodians may create significant operational challenges for investment advisers and limit their ability to safely and efficiently manage these assets for their clients. Furthermore, requirement for investment advisers to deliver notice to clients and include custodial account information may pose security and privacy concerns. In a digital era where cyber threats are on the rise, such mandatory disclosures increase the risk of identity theft or hacking incidents targeting these custodial accounts. Rather than enhancing investor protection, this requirement may inadvertently expose client assets to greater risks. In conclusion, while the goal of the proposed rule is to enhance investor safeguards, certain aspects need further refinement to ensure that it does not hinder investor access to digital assets or create unnecessary burdens for investment advisers. It is vital to strike a balance between safeguarding client assets and the continued growth and innovation in the digital asset space. Thank you for considering my comments on this important matter. Sincerely, John