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 understand the importance of enhancing investor protections and addressing gaps in the custody rule, I believe that certain aspects of the proposed rule may have detrimental effects on the growth and development of decentralized finance (DeFi) projects, particularly in the realm of digital assets or cryptocurrencies. The proposed rule includes amendments that expand the coverage of the rule to a broader range of investments held in a client's account, specifically addressing digital assets or crypto assets. While it is important to protect investor assets in this rapidly evolving sector, imposing stringent regulations may inadvertently hinder the innovative potential of decentralized finance. Digital assets, like cryptocurrencies, are built on blockchain technology and have the potential to transform the financial industry by providing novel ways of accessing financial services and promoting financial inclusion. By imposing onerous regulatory requirements on digital assets and DeFi projects, the proposed rule may discourage experimentation and investment in this space. This could stifle innovation, limit financial inclusion, and undermine the potential benefits that digital assets can bring to the economy. It is crucial to strike a balance between investor protection and fostering innovation in emerging technologies. Furthermore, the proposed rule discusses the challenges in demonstrating exclusive control over crypto assets. While ensuring the safeguarding of client assets is paramount, it is important to recognize that blockchain technology itself provides inherent security and transparency features that can mitigate some of these concerns. Rather than stifling innovation with burdensome regulatory requirements, it would be more appropriate for the SEC to work collaboratively with industry stakeholders to develop industry best practices and standards for the custody of digital assets. This approach would not only protect investors but also promote responsible innovation and allow for continuous improvement in the space. Additionally, the proposed rule introduces amendments to the surprise examination requirement, requiring written agreements with independent public accountants. While the intention behind this amendment is well-founded, it may create additional compliance burdens and costs for investment advisers. It is necessary to consider the cost-effectiveness and proportionality of these requirements, particularly for smaller advisers who may bear a disproportionate burden. Striking a balance between investor protection and regulatory burden is crucial for fostering a sustainable and vibrant investment advisory ecosystem. In considering the economic analysis of the proposed rule, it is important to recognize the potential impact on efficiency, competition, and capital formation. Overregulation in the digital assets space may hinder the efficiency of investments and limit market competition. It is essential to promote an environment that encourages competition, innovation, and capital formation while ensuring adequate investor protection. In conclusion, while I understand the SEC's intentions to enhance investor protections, I believe that the proposed rule may inadvertently impede the growth and development of decentralized finance projects. Imposing stringent regulations on digital assets and DeFi may hinder innovation, limit financial inclusion, and stifle the potential benefits that this sector brings to the economy. It is crucial to strike a balance between investor protection and fostering responsible innovation by collaborating with industry stakeholders and promoting industry best practices. Thank you for considering my concerns. I trust that you will carefully evaluate the potential negative impact of the proposed rule on decentralized finance and digital assets. Sincerely, Fearghas Hjort