In an effort to showcase a viable path for crypto firms within existing regulatory frameworks, the SEC invited Prometheum to testify before the House Financial Services Committee on digital assets. Despite being relatively unknown in the crypto space until now, Prometheum has been hailed as an example of compliance by the SEC. However, concerns have been raised about Prometheum’s background, with allegations of connections to multiple crypto scams and potential funding from the Chinese Communist Party (CCP).
The timing of this hearing coincides with the SEC’s heightened scrutiny of other firms that have actively engaged in regulatory discussions. These firms, arguably deserving of a better chance than Prometheum to operate compliantly, are facing a challenging regulatory landscape. Let’s delve into the sequence of events surrounding this peculiar situation. On June 13th, the House Financial Services Committee conducted a hearing on “The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem.” Aaron Kaplan, Co-CEO of Prometheum, was invited to testify. Prior to this week, Prometheum had limited recognition within the crypto community.
During Kaplan’s testimony, it became apparent that his responses were scripted, leading committee members and viewers to question his credibility. His answers closely mirrored the SEC’s narrative. Scott Johnsson remarked, “Prometheum’s CEO, whose credentials primarily involve leading a special purpose ATS/BD for digital securities, seems to have a lot of opinions on unrelated topics like banking principles and stablecoins. His prewritten notes curiously align with every question posed by the Democrats.” Now, let’s explore who Prometheum is and why they are relevant to this committee. Amidst the SEC’s legal battles with Coinbase and Binance, Prometheum secured approval for a groundbreaking Special Purpose Broker-Dealer (SPBD) license for digital asset securities. According to Kaplan, this license offers a compliant pathway for crypto firms, implying that no regulatory updates or changes to securities laws are necessary.
Committee member John Rose disputed Kaplan’s statements, highlighting that Gensler’s approval of this particular special purpose broker-dealer license does not indicate that the current system is effective. Why? Because an ATS (Alternative Trading System) cannot facilitate trading for unregistered securities without a valid exemption. Additionally, Gensler, the Democrats, and apparently Mr. Kaplan contend that almost all tokens are unregistered securities. Hence, this approval does nothing for retail investors and the general public. It is also worth noting that currently, there are no registered digital asset securities with significant customer demand and liquidity. For instance, can an ATS offer Solana or Cardano, which the SEC recently alleged are unregistered securities, to non-accredited retail investors? The answer is a resounding no. However, the proposed legislation would enable an ATS to list and trade digital assets alongside payment-stable coins and digital commodities.
The situation further deteriorates. A special purpose broker-dealer cannot currently have custody of both digital asset securities and commodities on the same platform for retail investors. The existing law classifies digital assets as either securities or commodities, rendering the SPBD license essentially useless. Moreover, the SEC expects digital assets to be registered by promoters, which is impractical for public blockchain networks with open-source projects and anonymous or pseudonymous founders. Currently, there are zero tokens registered with the SEC because the existing regulatory regime is infeasible for public blockchain networks.
The current regulatory framework does not enable licensed broker-dealers to operate effectively in the digital asset space. Representative Mike Flood challenged Prometheum’s claims during the hearing, deeming them nonsensical. Prometheum’s clients cannot even trade popular and widely-used digital assets like BTC and ETH, which comprise 60% of the digital asset market. As Mike Flood succinctly put it, “If the current system is functioning properly, why can