Oct. 18, 2023
Dear SEC,
As someone engaged in the realm of Cryptocurrency and digital assets, I hold significant reservations regarding the SEC's proposed "Safeguarding Advisory Client Assets" regulations. While acknowledging the importance of protecting investors and curbing fraudulent activities, I perceive this proposal as an undue encroachment by the SEC into the domain of cryptocurrencies and digital assets.
First and foremost, it is important to recognize that cryptocurrencies and digital assets are fundamentally different from traditional securities. Cryptocurrencies operate on decentralized networks, and are NOT issued by any central authority, and often serve as utility tokens within specific ecosystems. Therefore, applying the same regulatory framework designed for traditional securities to these innovative assets is not only impractical but also stifles innovation in this rapidly evolving industry.
Second, it is important to note that cryptocurrencies and digital assets are already subject to existing laws and regulations. The SEC has previously classified certain cryptocurrencies as securities, and these are already subject to the regulatory framework established by the Securities Act of 1933 and the Securities Exchange Act of 1934. This means that any fraudulent activities or misrepresentations related to these assets can already be prosecuted under existing laws.
The SEC has also previously stated that cryptocurrencies such as Bitcoin and Ethereum are not considered securities under the Howey Test. Therefore, it is unclear why the SEC feels the need to impose additional regulations specifically targeting these assets. This proposal seems to be an unnecessary duplication of existing laws and regulations.
Unlike traditional securities, cryptocurrencies are decentralized and operate on blockchain technology. They do NOT rely on intermediaries or custodians to hold or transfer assets. This decentralized nature makes it challenging to apply traditional custody rules to these assets. Imposing stringent custody requirements on advisory firms dealing with cryptocurrencies would not only be impractical but could stop innovation, development, and the growth of certain systems within the rapidly evolving crypto industry.
Moreover, the lack of a clear and comprehensive definition of what constitutes custody in the context of digital assets within the proposed regulation adds to the ambiguity and confusion surrounding its implementation. Without a precise understanding of the scope and boundaries of the proposed custody requirements, compliance becomes a convoluted and uncertain process for businesses, potentially leading to inadvertent violations and legal entanglements. This ambiguity not only undermines regulatory certainty but also contributes to an environment of unnecessary apprehension and hesitancy within the cryptocurrency and digital asset sector.
Additionally, the proposed regulation could have unintended consequences for individual investors.
By imposing burdensome custody requirements, smaller advisory firms may be discouraged from engaging with cryptocurrencies and digital assets, depriving individual investors of access to expert advice in this complex and rapidly evolving field. This limitation could prevent investors from benefiting from potential opportunities for growth and diversification that the cryptocurrency market offers.
It is essential that any regulatory approach by the SEC in the realm of cryptocurrencies and digital assets be thoughtful, nuanced, and grounded in a comprehensive understanding of the technologies and market dynamics at play. A collaborative and consultative approach, engaging industry experts and stakeholders, would be more effective in developing regulations that promote innovation while safeguarding investor interests. The current proposed regulation, in its broad and inflexible approach, not only fails to achieve these objectives but also risks hindering the potential of a burgeoning sector that holds promise for the future of finance.
Thank you for you time
File Number: S7-04-23