Oct. 26, 2023
Dear Securities and Exchange Commission, I am writing to express concerns regarding potential unintended consequences of the proposed rule changes around safeguarding client assets, specifically relating to digital assets and cryptocurrency communities. While the overall goals of better protecting client assets are positive, several aspects of the proposal may disproportionately impact digital asset investors and companies: Strict custodial requirements could severely constrain innovation using decentralized finance (DeFi) protocols, crypto wallets, smart contracts, and other solutions built on blockchain technology. These tools are designed to empower investors with control and flexibility in a digital asset environment. Prescriptive custody rules may limit investor choice and participation in Web3 platforms. Similarly, pooled account restrictions could prevent cryptocurrency exchanges from offering staking, lending, and yield opportunities which are important services in digital asset markets. Allowing properly disclosed and controlled omnibus accounts enables broader access to these benefits for crypto investors. Short mandatory breach notification windows may not align with responsible disclosure practices in decentralized blockchain networks. Forcing rushed reporting of vulnerabilities could inadvertently spread risks before issues can be addressed. Adding auditing requirements for proof of reserves could be technically challenging for firms handling digital assets across dispersed global networks, cold storage, etc. These complexities may create barriers to servicing digital asset investors. Overall, a tailored approach is needed to balance innovation and flexibility for the unique digital asset ecosystem with sensible investor protections. Imposing restrictive custody, pooled account, notification, and auditing rules optimized for traditional assets may stifle further responsible evolution of cryptocurrency finance. I urge the SEC to carefully consider the downsides and unintended consequences for the growing digital asset community when finalizing any new client asset safeguarding regulations. Thank you for your consideration.