Oct. 23, 2023
Dear SEC, I am writing to express my concerns regarding the proposed rule on Safeguarding Advisory Client Assets. While the aim of enhancing investor protections is commendable, I believe that several aspects of the rule require further consideration and revision. Specifically, my concerns lie in the treatment of digital assets, such as cryptocurrency, and the impractical regulatory requirements imposed upon investment advisers dealing with these assets. The SEC's failure to adequately consider the unique properties of cryptocurrency and the decentralized nature of blockchain technology has resulted in proposals that may inhibit innovation and pose challenges to both advisers and investors. Digital assets, including cryptocurrency, have the potential to transform the financial industry and increase access to investment opportunities. However, the regulatory uncertainties surrounding these assets have stifled their widespread adoption. Rather than embracing the potential of digital assets, the proposed rule appears to impose outdated and impractical requirements that fail to acknowledge the advancements and complexities of blockchain technology. One area of concern is the proposed definitions and scope of the rule. While it is vital to protect client assets, the broad expansion of coverage to include a wider range of investments held in a client's account fails to consider the unique characteristics of digital assets. These assets operate within decentralized networks, making the notion of traditional custodial control challenging. By requiring the same regulatory framework for digital assets as traditional assets, the SEC risks hindering the growth and development of innovative digital asset investment opportunities. Additionally, the proposed rule's discussion on the application of the Safeguarding Advisory Client Assets rule to digital assets raises further concerns. The challenges of demonstrating exclusive control over digital assets are significant due to the decentralized nature of blockchain technology. Imposing stringent regulatory requirements without considering these challenges may lead to an unfair burden on investment advisers and disincentivize their participation in the digital asset space. Furthermore, the proposed rule's focus on maintaining client assets with a qualified custodian may not align with the inherent nature of certain digital assets. The SEC must recognize that digital assets cannot always be safeguarded through traditional custodial methods. Instead of imposing stringent obligations, the rule should provide more clarity on alternative methods that can be used to safeguard these assets. Enhanced recordkeeping, separation of duties, and regular reviews, as suggested by the proposed rule, can be effective in preventing improper use of digital assets. The rule's requirement for investment advisers to deliver notices to clients when opening an account with a custodian is also cause for concern. While the intention behind this requirement is to enhance transparency, it may inadvertently expose sensitive information about digital asset holdings, potentially increasing the risk of malicious attacks and theft. The SEC should explore alternative methods of ensuring transparency and investor protection without compromising the security of digital assets. Furthermore, the proposed amendments to the Surprise Examination Requirement fail to address the unique challenges presented by digital assets. The requirement for an independent public accountant to conduct surprise examinations could be onerous and expensive, especially when applied to cryptocurrency assets stored in secure digital wallets. The SEC should consider developing alternative examination methods that are specifically tailored to the digital asset landscape. It is also important to highlight the potential economic impact of the proposed rule on innovation and competition within the digital asset industry. By imposing stringent requirements without adequately understanding the complexities of digital assets, the rule may deter investment advisers from engaging in this emerging market. This could stifle competition, limit investor access to innovative investment opportunities, and impede the growth of the digital asset sector. In conclusion, while the SEC's proposed rule on Safeguarding Advisory Client Assets aims to enhance investor protections, it falls short in adequately considering the unique properties and challenges of digital assets, such as cryptocurrency. The regulatory burden imposed on investment advisers, without appropriate adaptation to decentralized technologies, may hinder innovation and limit investor access to evolving investment opportunities. I encourage the SEC to reassess these proposals and engage with industry experts to ensure a balanced and effective regulatory framework for digital assets. Thank you for considering my comments on this important matter. Sincerely, John Finn