Oct. 30, 2023
Dear esteemed members of the Securities and Exchange Commission (SEC), I belive that it is not a good approach to force digital asset managers to perform regular surprise examinations by independent public accountants. In my view, this requirement would put small crypto hedge funds out of business because many of them cannot afford to pay for such services regularly. Instead, I suggest that these firms should only be required to submit an audit report annually or biannually depending on the fund's size and activity levels. Applying traditional accounting methods to cryptocurrencies might not be practical since the technology operates differently than conventional fiat currencies. Therefore, I am for more innovative solutions tailored specifically to digital assets. The debate between proponents of strict regulation versus lighter touch approaches often revolves around finding a balance between protecting investors and promoting market efficiency. Forcing small digital asset managers to conduct frequent surprise audits, which typically cost thousands of dollars per engagement, could put them at a disadvantage relative to larger competitors due to financial constraints. This could result in fewer options available to smaller investors seeking exposure to emerging asset classes like cryptocurrencies, potentially limiting access to high-growth opportunities. On the other hand, supporters of the proposal contend that increased oversight is essential to preventing fraudulent activities and ensuring proper handling of client assets, given the significant risks inherent in investing in highly volatile and unregulated digital tokens. It could lead to an erosion of individual privacy and financial freedom. I believe that increased regulation could undermine this core tenet by forcing users to reveal sensitive data such as identity documentation or transaction history to authorities. This, in turn, could create a chilling effect on adoption rates among those who value decentralization and autonomy above all else. Overbearing regulation could create unnecessary burdens for lawful cryptocurrency users while doing little to prevent illicit activity. As with any policy debate, it is crucial to consider multiple perspectives before making decisions about how to proceed. Therefore, it is vital to weigh the benefits of enhanced investor protection against the potential drawbacks of infringement upon individual rights and freedoms when crafting policies related to cryptocurrencies. These tensions highlight the challenges involved in crafting effective regulatory policies, particularly regarding nascent technologies whose unique features present novel risks and rewards compared to established financial products. Policymakers must consider a range of factors when designing regulatory frameworks, including the nature of the product, the characteristics of the user base, and the likely effects on various stakeholders, among others. Striking the right balance requires careful analysis and ongoing monitoring to adapt to changing circumstances as the underlying landscape continues to evolve. I call for more creative ideas to address the unique aspects of digital asset management rather than simply transposing traditional regulatory models onto this new domain. Some possible examples of innovative solutions could include: - Developing blockchain-based systems capable of automatically verifying certain types of transactions without requiring intermediaries, thereby reducing reliance on third-party custodians and streamlining processes while enhancing security. - Employing cutting-edge analytical tools and data sources to help digital asset managers identify and mitigate hidden risks, enabling more informed decision-making amid the extreme volatility characteristic of cryptocurrency markets. - Creating specialized audit methodologies designed specifically for digital assets, taking into consideration the distinctive attributes of decentralized finance, such as smart contracts, DAOs, and DeFi protocols, which can pose different kinds of threats and opportunities compared to traditional securities. These proposals represent just a few possibilities; however, they illustrate how innovations in areas like fintech and blockchain technology can provide fresh perspectives on how to regulate the digital asset ecosystem effectively. By embracing a more flexible and experimental approach, policymakers can foster innovation and minimize undue barriers to entry, while still safeguarding investor interests and maintaining fair competition within the industry. Best regards Vladimir Concere