Oct. 30, 2023
Dear Securities and Exchange Commission, I am writing to express my concerns regarding the proposed rule "Safeguarding Advisory Client Assets." While I acknowledge the necessity of enhancing investor protections and addressing gaps in the custody rule, I believe that there are certain aspects of the proposed rule that may have a negative impact on investor access, particularly in the realm of digital assets or cryptocurrencies. Digital assets, such as cryptocurrencies, have become an important and rapidly growing asset class. They hold immense potential for both investors and the economy as a whole, leveraging the transformative power of blockchain technology. However, the regulatory environment surrounding digital assets is still evolving, and it is crucial that any new rule does not stifle innovation and limit investor access to this emerging market. The proposed rule expands the coverage of assets held in a client's account and provides definitions for assets and custody that includes discretionary authority in custody. While this expansion may intend to protect investors, it may inadvertently hinder their ability to participate in the digital asset market, which typically involves self-custody or the use of new custody solutions tailored specifically to digital assets. One of the challenges in safeguarding digital assets is demonstrating exclusive control due to the nature of decentralized networks and blockchain technology. It is crucial for the SEC to work with industry participants and experts to develop appropriate safeguards that strike a balance between protecting investor assets and allowing for innovation and growth in the digital asset space. Furthermore, the proposed rule addresses how advisers can safeguard assets that cannot be maintained with a qualified custodian. While enhanced recordkeeping, separation of duties, and regular reviews can be effective measures, it is important to ensure that these requirements do not disproportionately burden advisory firms that specialize in or manage digital assets. Different custody arrangements and security measures may be required to adequately safeguard digital assets, and these specialized solutions should be considered in the proposed rule. In addition, the proposed rule requires advisers to notify clients in writing when opening an account with a custodian. This notice includes custodian information and custodial account number. While it is important for clients to have transparency and be aware of custodial arrangements, this requirement should be applied in a manner that does not unduly burden advisory firms operating in the digital asset space, as the mechanics of custody for digital assets can be different from traditional assets. I urge the SEC to carefully consider the unique characteristics and challenges of digital assets when finalizing the proposed rule. The SEC should work collaboratively with industry participants and experts to strike the right balance between protecting investor assets and enabling innovation and growth in the digital asset market. Failure to do so risks stifling investor access and hindering the potential benefits that come from this transformative asset class. Thank you for considering my concerns. I hope that you will take them into account when finalizing the rule. Sincerely, Paul Stone