Oct. 22, 2023
Dear Securities and Exchange Commission, Thank you for the opportunity to provide public comment on the proposed rule "Safeguarding Advisory Client Assets". I would like to address my concerns regarding the inadequate consideration of the unique properties of cryptocurrency within the proposed rule. It is essential to recognize the decentralized nature and technological complexities of cryptocurrency, as they significantly affect the feasibility and practicality of the regulatory requirements. Digital assets, such as cryptocurrency, have emerged as a transformative force in the financial industry. Built on blockchain technology, these assets offer numerous advantages, including increased accessibility, security, and efficiency. However, regulatory uncertainties surrounding cryptocurrency have created challenges for market participants and regulators alike. The Securities and Exchange Commission plays a crucial role in providing comprehensive and effective regulations, and it is vital to fully understand the nuances of digital assets before imposing burdensome requirements. One concern is the definition of assets in the proposed rule. While it aims to expand the coverage to a broader range of investments held within a client's account, the definition should take into account the unique characteristics of cryptocurrencies. Unlike traditional assets, digital assets exist in a decentralized network and are not confined to a specific custodian or physical location. As such, the application of custody requirements for cryptocurrency raises significant challenges that warrant careful consideration. Imposing custody responsibilities on investment advisers without adequate guidance or understanding of the technology could result in impractical and burdensome compliance obligations. In the proposed rule, the Securities and Exchange Commission acknowledges the challenges arising from demonstrating exclusive control over cryptocurrency assets. However, more clarity and flexibility are needed to address these challenges. For example, considerations should be given to innovative custody solutions that are emerging within the cryptocurrency ecosystem, such as multi-signature wallets or smart contract-based escrow services. These solutions can provide a higher level of security and custody assurance, ensuring the client's assets are protected while allowing investment advisers to maintain compliance. Additionally, the proposed rule highlights the requirement for regular reviews and enhanced recordkeeping of assets that cannot be maintained with a qualified custodian. While the intent is to safeguard client assets, this requirement fails to recognize the significant technical complexities associated with verifying ownership and the integrity of blockchain-based assets. It is crucial to strike a balance between client protection and practicality, ensuring that the burden placed on investment advisers is in line with the unique characteristics of cryptocurrency. Furthermore, the proposed rule should provide clearer guidance on the segregation of client assets when it comes to digital assets. Cryptocurrencies are inherently designed to be divisible, and individual units can be easily separated from one another. As such, segregating digital assets may require different methodologies compared to traditional assets. The rule should consider alternative approaches that align with the digital nature of cryptocurrency to avoid unintended consequences and unnecessary operational complexities for investment advisers. In conclusion, as the Securities and Exchange Commission seeks to enhance investor protections and address gaps in the custody rule, it is crucial to adequately consider the unique properties of cryptocurrency. The decentralized nature and technological complexities present inherent challenges that require thoughtful and pragmatic regulatory solutions. By engaging with stakeholders, including industry experts and market participants, the SEC can ensure that the proposed rule is both effective and feasible in the rapidly evolving field of digital assets. Thank you for your attention to these concerns. I trust that you will carefully evaluate the public comments and refine the proposed rule to address the issues raised. Should you require any further information or have any additional questions, I am available to assist. Sincerely, Phill