Oct. 30, 2023
Dear Sir/Madame, We appreciate your efforts to enhance regulatory protections for investors through the Safeguards Advisory Client Assets rule proposal. However, we would like to draw attention to some concerns surrounding potential ambiguities and unintended consequences that may arise if this regulation is extended to cover digital asset holdings. As you know, digital currencies differ significantly from traditional securities due to their decentralized nature and reliance on blockchain technology. Strict digital signature verification procedures, recommended under your proposed amendments, may pose challenges for clients trying to recover their digital asset holdings stored within custodial wallets controlled by digital asset managers. For example, enhanced digital signature validation processes may increase transaction delays, leading to slower fund recovery times. Such inconveniences could deter some investors from entrusting their digital assets with regulated entities, leaving them vulnerable to fraud or other malicious actors operating outside the oversight of established governance mechanisms. Moreover, since digital assets commonly function beyond the scope of current US securities legislation, the proposed relaxation of communication constraints during crises or emergencies may result in further uncertainty for regulators, law enforcement bodies, and trading platforms tracking suspicious digital asset transactions. Discrepancies in interpretation could emerge, causing difficulties in formulating standardized compliance policies for handling potentially problematic events. These differences could also introduce complications in cross-border investigations and prosecution initiatives aimed at combatting criminal networks utilizing digital currencies for nefarious purposes. Lastly, while the proposed revision of recordkeeping criteria may facilitate operational efficiency improvements for organizations managing both digital and conventional securities, it could foster opportunities for misconduct by fraudsters exploiting gaps left by less rigorous documentation expectations. Digital assets can be easily transferred, enabling criminals to obscure illicit transfers by concealing digital trail evidence using anonymity-enhancing techniques inherent in public blockchains or private distributed ledger systems. More lenient documentation obligations might make it more challenging to detect such behavior, allowing offenders to evade authorities and compromise innocent parties' assets. In light of the above considerations, we urge you to exercise caution and diligence while assessing the applicability of the proposed rule updates to digital asset management contexts. We recommend conducting thorough consultative sessions with representatives from the digital asset community before finalizing the proposals to ensure a comprehensive understanding of the implications associated with applying these measures to digital assets. Such engagement would provide insights into how to strike a balance between improving safety standards for all types of assets whilst preserving innovation, market integrity, and technological progressiveness. Thank you for considering our views; we look forward to working collaboratively towards advancing safe and equitable financial environments for everyone involved. Best regards, Jan Pieter