Oct. 27, 2023
To the Securities and Exchange Commission (SEC), I am writing to express deep concerns over this proposed rule pertaining to the custody of cryptocurrencies and digital assets. I believe the proposed regulations, though well-intentioned, overlook the unique nature of digital assets and may inadvertently hinder innovation, limit consumer choice, and create undue burdens for market participants. Digital Assets are Fundamentally Different: Traditional custody regulations and standards have been developed for traditional assets which inherently differ from digital assets. The decentralized and cryptographic nature of cryptocurrencies means that "custody" does not fit neatly within our traditional understanding. Applying conventional standards could lead to misaligned incentives and counterproductive practices. Legal Precedent: The "Howey Test" is a cornerstone of our securities law, designed to determine when an arrangement involves an investment contract. It’s a prime example of how the SEC has historically recognized that not all assets and transactions fit neatly within pre-existing categories. Technical Challenges of Custodial Services: The proposed rule may mandate overly prescriptive technical requirements for custodians. This can stifle innovation and discourage new entrants from participating in the market. Legal Backing: As per the Administrative Procedure Act (5 U.S.C. § 706(2)(A)), the SEC should avoid enacting rules that are "arbitrary or capricious." Setting overly rigid technical standards, without ample flexibility, could be viewed in this light. Consumer Protection and Choice: Consumers should be empowered to make informed decisions regarding their own assets. Over-regulating custodial services might push users to unsafe platforms or self-custody solutions without adequate security knowledge. Legal Consideration: Historically, the SEC v. W.J. Howey Co., 328 U.S. 293 (1946) case emphasized the importance of economic reality over form. The economic realities of today dictate a rapidly changing landscape where users are demanding more control over their assets. Unintended Consequences: Heavy-handed regulation could result in the U.S. being left behind as other countries adopt more adaptive regulatory frameworks. This is not just about the economic competitiveness of the country, but also about leading the charge in defining the ethical and practical standards for this new frontier of finance. Legal Framework: The U.S. has a tradition of fostering innovation, as illustrated by cases such as Leidos, Inc. v. Indiana Public Retirement System, No. 16-581. The decision underscored the importance of providing a complete view and not imposing unnecessarily burdensome disclosures. This spirit should guide our approach to new asset classes. Overlapping Jurisdiction: The U.S. regulatory landscape is already complex, with multiple agencies having overlapping jurisdictions over various aspects of digital assets. Introducing more stringent custody rules can exacerbate inter-agency conflicts and confuse market participants. Legal Cognizance: In the case of SEC v. Caledonian Bank Ltd., 223 F. Supp. 3d 279 (S.D.N.Y. 2016), the court underlined the need for clear delineation of roles and responsibilities. This clarity is crucial in the evolving world of digital assets. Historical Parallel: Reflect on the dawn of the internet. It was met with skepticism and calls for strict regulation. Yet, a judicious approach enabled the U.S. to pioneer the digital age. We're at a similar crossroads with digital assets. Championing Innovation: The U.S. stands poised to sculpt the international regulatory narrative for digital assets. A balanced approach could solidify our leadership, influencing global standards. Unleashing Economic Potential: Like the meteoric rise of Silicon Valley, the crypto realm offers unparalleled economic promise. By fostering this sector, we can anticipate a surge in job opportunities, capital inflow, and tech advancements. In conclusion, while the intention to safeguard investor interests is commendable, the proposed custody rule for cryptocurrencies and digital assets must be crafted with precision, understanding, and foresight. We urge the SEC to engage in further consultation with industry experts, market participants, and other stakeholders to craft a regulatory framework that truly aligns with the realities of the digital asset space.