Yesterday 23 Republican representatives from the House Financial Services Committee shared a letter sent to the SEC querying the grant of the first and only special purpose broker dealer license to Prometheum Ember Capital in May. It requested all communications regarding Prometheum by August 22.
Prometheum is structured in a similar way to traditional finance (TradFi) infrastructures, with separation between its exchange (a regulated ATS) and the broker dealer that’s responsible for custody. The founders are securities lawyers and their father runs a specialist securities law firm. At the time of the license grant we also highlighted that it had received investment from Hong Kong’s HashKey and China’s Wanxiang Blockchain.
The lawmakers want to know why Prometheum, which has not yet traded, was granted approval by FINRA while others have not. They raise three issues:
- The timing of the license grant
- Which cryptocurrencies are securities
- Chinese involvement in Prometheum.
The timing and Chinese involvement
They are concerned about the timing of the approval, given draft legislation was due to be released shortly after. It seems they believe this was to demonstrate that new legislation was unnecessary.
The Republicans also highlight the Chinese partial ownership of the company, although Prometheum founder Aaron Kaplan previously addressed this in Congressional testimony. He stated that all the technology was developed in-house despite original plans to codevelop with its Chinese backer Wanxiang Blockchain. What is often not mentioned is that Ethereum founder Vitalik Buterin was formerly Chief Scientist at Wanxiang Blockchain, which founded the main blockchain conference in China in conjunction with the Ethereum Foundation.
The Catch 22 of crypto securities
The challenge with a regulated crypto entity is which cryptocurrencies can be traded as regulated securities. Bitcoin is considered a commodity, and Ether might be. While most cryptocurrencies are considered as securities by the SEC, you can probably count the number that have registered on one hand.
Hence, as a regulated digital asset service provider, it seems inappropriate to support trading of an unregistered security. Despite this, a screenshot on Prometheum’s home page shows an image that includes several cryptocurrencies (eg. Flow, Filecoin) designated as unregistered securities by the SEC. So probably the only thing that Prometheum can trade for now is tokenized equity or debt securities.
Meanwhile, this is at least the third time this subject has been raised by Republicans. In June Senator Turberville wrote an op-ed on the topic in the Wall Street Journal (article unlocked). And Representative Torres wrote a letter to the SEC Inspector General last month. Additionally, the issues have been raised in Congress.
Given the number of signatories, it’s unclear whether the letter should be taken at face value or whether this is part of a campaign by two of the letter’s signatories to have SEC Chair Gary Gensler fired.