Oct. 11, 2023
To whom it may concern, I strongly oppose the proposed rule File Number S7–04–23, which would change the custody rules for investment advisers. This rule would harm the crypto industry and its investors, for these reasons: The rule would force investment advisers to get consent from clients every time they move their assets, which is impossible or impractical for some crypto platforms, such as smart contracts or decentralized exchanges. This would create burdens and reduce efficiency and innovation. This applies to several decentralized protocols. One example, an investment adviser using HEX to earn interest on their client’s crypto assets would have to get consent every time they burn or mint their coins, which is very inconvenient and time-consuming. Moreover, if the client is not available or reachable, the investment adviser might miss out on profitable opportunities or face losses due to market fluctuations or late un-staking penalties. In addition, this would mean that you are now relying on someone else to mint or burn your crypto and it will no longer be just you and the decentralized code. The rule would interfere with the rights and obligations of investment advisers and their custodians, who are usually crypto wallets or service providers that hold client assets. The rule would change the terms that are agreed by the parties, such as the ownership, control, and access of private keys or recovery phrases that secure and access client assets. The rule would also make custodians liable for any loss or misuse of client assets, even if they are not at fault. These changes would undermine the security and privacy of client assets, and create conflicts with other laws and regulations. For example, an investment adviser using MetaMask or Ledger to store their client’s crypto assets online would have to share their private keys or recovery phrases with the SEC or an auditor, which could expose them to hacking or theft. The rule would stifle innovation and competition in the crypto markets, by discouraging investment advisers from using new technologies or platforms that benefit their clients. The rule could limit the use of cryptocurrencies or blockchain technology, which enable financial autonomy and decentralization. The rule could also censor or penalize investment advisers who promote or discuss these technologies, even if they are not fraudulent. These restrictions could slow down human progress and infringe on personal freedoms. For example, an investment adviser using PulseChain to access a faster and cheaper version of Ethereum for their client would have to comply with the custody rules that might not work with PulseChain. Moreover, if the investment adviser wants to educate their client about PulseChain, they might face trouble from the SEC for expressing their opinions. The rule would deprive investors of their freedom and choice to make their own decisions regarding investments, and to hold their own keys if they prefer. This would reduce their safety and limit their opportunities to benefit from being early adopters of new technologies. Investors should be able to decide how much risk they are willing to take, and how much trust they are willing to place in their investment advisers or custodians. Investors should also be able to hold their own keys if they want to have full control and responsibility over their assets, without having to share them with anyone else. This way, they can avoid the risks of hacking, theft, or loss that might arise from third-party custody. Holding one’s own keys also enables investors to access new platforms and services that might not be compatible with traditional custody arrangements, such as decentralized applications or protocols that offer novel features and functions. By holding their own keys, investors can be safer and be able to take advantage of being early on the adoption curve. For these reasons, I urge the SEC to reconsider the proposed rule File Number S7–04–23, and adopt a more flexible and balanced approach that respects both investment advisers and their clients. Thank you for your consideration. Sincerely, -- -Robert Woods