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Four Republicans Pen Letter to SEC and FINRA, Say Regulators ‘Complicit’ in Perpetuating Confusion in Crypto

Four Republicans Pen Letter to SEC and FINRA, Say Regulators ‘Complicit’ in Perpetuating Confusion in Crypto

Four Republican members of the U.S. House Committee on Financial Services are expressing concern over the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority’s (FINRA) stance on Prometheum Capital’s launch of Ethereum (ETH) custody services. In a letter addressed to SEC Chair Gary Gensler and FINRA President and CEO Robert Cooke, […]

The post Four Republicans Pen Letter to SEC and FINRA, Say Regulators ‘Complicit’ in Perpetuating Confusion in Crypto appeared first on The Daily Hodl.

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US lawmakers demand SEC-FINRA records on Prometheum ETH custody

Prometheum’s willingness to play along with the SEC’s ambitions for crypto regulation has stirred disapproval in many quarters.

Members of the United States Congress want to know what the Securities and Exchange Commission and Financial Industry Regulatory Authority (FINRA) were talking about when the SEC established Special Purpose Broker-Dealer (SPBD) requirements. They suspect the organizations and crypto trading and custody services provider Prometheum are setting an unwelcome precedent.

Chairman of the House Financial Services Committee Patrick McHenry and subcommittee heads Bill Huizenga and French Hill, all Republicans, stated in a letter to SEC Chair Gary Gensler that they were dissatisfied with the SEC’s response to a March 26 inquiry by 48 members of the House Financial Services and Agriculture Committees concerning Ether’s (ETH) classification as a security, rather than a commodity, and Prometheum’s intent (since realized) as an SPBD to custody ETH.

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Prometheum launches Ether custody service that treats ETH as a security: Report

The digital assets platform soft-launched its controversial Ethereum custody service on May 17 and is targeting a full launch next month.

Digital asset trading and custody firm Prometheum has reportedly soft-launched its controversial Ether (ETH) custody service, which treats digital assets as security.

According to a May 20 report from Fortune, the custody solution has been rolled out to a few select companies on May 17, with a full-scale launch expected to take place in June.

Prometheum is targeting its services toward asset management firms, hedge funds, banks and registered investment advisors and aims to expand to retail clients later in 2024.

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How are crypto firms responding to US regulators’ enforcement actions?

Prometheum was purportedly "purpose-built to comply with federal securities laws" and has avoided lawsuits from the SEC when compared with firms like Binance and Coinbase.

United States regulators including the Securities and Exchange Commission (SEC) have ongoing civil cases against major cryptocurrency firms including Binance, Coinbase, and Ripple, but not every company has been subject to the same treatment.

Gary Gensler, serving as SEC chair since 2021, has been widely criticized by many lawmakers and industry leaders for a “regulation by enforcement” approach to crypto companies and offerings. Some of the cases have ended up in federal courtrooms to determine what may qualify as a security in the United States, and not all judges’ decisions have necessarily been favorable to the regulator.

The commission filed a lawsuit against Ripple in December 2020 over XRP as an allegedly unregistered offering, but received a partial summary judgment in July that the token was largely not a security. Coinbase, which seemed to expect legal action ahead of the SEC’s lawsuit filed in June, targeted the regulator in response to its case, claiming the exchange tried to “come in and register” without success or proper feedback.

Prometheum, a crypto firm which gained a lot of media attention in June following co-CEO Aaron Kaplan testifying before the House Financial Services Committee on digital asset regulation, received approval from the Financial Industry Regulatory Authority as a special purpose broker-dealer (SPBD) for digital asset securities in May. Some of the firm’s subsidiaries, which also deal in digital assets, have successfully registered with the SEC.

“Prometheum was purpose-built to comply with federal securities laws and create the first digital asset security trading platform subject to those laws including investor protection rules,” Kaplan told Cointelegraph. 

Kaplan’s approach would seem to suggest that certain firms like Coinbase, Binance, and Ripple launched services in the U.S. with the intention of trying to change existing regulations. Major players have sometimes lobbied for legislation favorable to crypto firms: Coinbase CEO Brian Armstrong has been a regular presence in Washington DC and encouraged users to back political candidates in support of pro-crypto policies.

According to the Prometheum co-CEO, certain crypto companies “have been working to rewrite or amend existing laws in their favor and to the detriment of retail investors”, speculating that the current frameworks are incapable of dealing with digital assets. Many industry leaders and lawmakers have echoed similar concerns, claiming crypto firms in the U.S. have an uphill battle in recognizing what digital assets qualify as securities.

Kaplan hinted the fact that Prometheum was able to obtain a SPBD license was evidence that regulatory compliance was at least possible. However, the approval has led to calls to investigate the firm by advocacy groups including the Blockchain Association and crypto-minded members of Congress.

“We are concerned that the [SEC] granted Prometheum a ‘sweetheart’ deal in exchange for support of the Commission’s policy goals, or that Prometheum is leveraging personal connections with the Commission to gain an unfair advantage in the market,” said the Blockchain Association in July. “Most significantly, we are concerned that Chair Gensler is using Prometheum and the SPBD licensure process as a means to thwart congressional efforts toward legislation by continuing to spread the false narrative that the law is already clear with regard to digital asset securities.”

Kaplan added:

"From the moment Prometheum received its SPBD license, there was a seemingly concerted effort by various industry associations and lawmakers to discredit the more than 6 years of hard work we have put in to build our company."

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It’s unclear if Prometheum's approach will work for existing players in the space in an effort to sidestep enforcement actions, or for up-and-coming projects aware of the regulatory challenges in the United States. David Hirsch, head of the SEC’s crypto enforcement division, reportedly said at a Sept. 19 conference that though the commission was currently embroiled in several civil lawsuits, it would continue to bring actions against firms it saw as violating U.S. securities laws — including decentralized finance projects.

Gensler will be testifying before the U.S. House Financial Services Committee on Sept. 27 in a hearing on SEC oversight. According to a Sept. 22 memo, lawmakers will question the SEC chair on matters including policies on digital asset custodial activities and expansion of the commission’s authority over crypto firms.

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Blockchain Assoc. requests info on Prometheum over ‘suspicious’ approval

A FOIA request with the SEC regarding Prometheum has been filed, while others found former FINRA and SEC staffers among the firm's ranks.

United States crypto lobby group Blockchain Association has filed a request with the U.S. Securities and Exchange Commission, seeking information about the formerly little-known crypto company Prometheum.

The company became the center of the crypto industry's attention this week when its CEO Aaron Kaplan testified at a House hearing and gave its support of regulating crypto under securities laws and the SEC, a position that’s starkly opposite to other vocal proponents of the industry.

On June 15, Blockchain Association counsel Marissa Coppel said the group filed a Freedom of Information Act (FOIA) request to the SEC seeking documents and communications related to Prometheum.

In a series of tweets, Coppel said she was “suspicious” Prometheum was approved as a special purpose broker-dealer (SPBD) for digital assets “in the midst of aggressive SEC enforcement.”

Coppel was also skeptical at how Kaplan was able to provide testimony at a Congressional hearing on regulations for the industry.

FOIA requests are submissions by members of the public to U.S. federal agencies that can ask for records on any topic, in this case, the SEC’s information on Prometheum.

At the June 13 House hearing Kaplan said his firm did not receive any “additional exemptive relief from the SEC” when questioned by Representative Mike Flood.

Former SEC and FINRA staff

Meanwhile, others have raised suspicion over the background of the Prometheum team, noting that some are former SEC and Financial Industry Regulatory Authority (FINRA) staffers.

Prometheum’s chief compliance officer, Joseph Zangri, was an SEC enforcement attorney in the mid-to-late 1990s. In addition, the company’s chief regulatory officer, Rosemarie Fanelli joined the company in May 2021 after a nearly 14-year stint in senior roles at FINRA — a self-regulatory organization for the U.S. securities industry.

The co-founders and co-CEOs of Prometheum — Aaron and Benjamin Kaplan — also have a small degree of separation from former SEC staff. The Kaplans are attorneys at the law firm Gusrae Kaplan which states it was established “by a former Chief Attorney of the SEC’s Division of Enforcement.”

Gusrae Kaplan co-founder, Martin H. Kaplan, is also a Prometheum chairman.

It is not out of the ordinary for crypto companies to hire former regulatory staffers, however.

Following a lawsuit from the SEC, Binance.US hired former SEC enforcement co-director George Canellos as a lawyer. The newly appointed chief legal officer of stablecoin issuer Circle has a resume spanning many government roles including the U.S. Treasury and the Commodity Futures Trading Commission.

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‘Who the hell’ is Prometheum and what did it say to Congress about SEC compliance?

A testimony given at a United States House of Representatives hearing by the blockchain firm’s co-founder, Aaron Kaplan, has drawn the attention of those in the crypto space.

The relatively under-the-radar crypto company Prometheum has been thrust into the spotlight after a recent testimony from its co-founder before a United States House Committee, discussing crypto regulatory clarity.

On June 13, Prometheum co-founder and co-CEO Aaron Kaplan appeared before the U.S. House at a hearing to discuss providing regulatory clarity to the crypto industry.

Contrary to recent commentary from crypto industry players such as Coinbase, Kaplan’s testimony appears to be supportive of regulating crypto under current securities laws — a view also shared by the Securities and Exchange Commission.

Attention was also brought to Kaplan’s testimony on social media, including a widely shared June 14 Twitter thread from Castle Island Ventures partner Matt Walsh, who shared what he claims are “bizarre” facts about the company and its co-founder.

The thread has also prompted many — including Cardano and Ethereum co-founder Charles Hoskinson — to ask just who Kaplan and Prometheum are, and why they appear to be unheard of before.

The Wall Street-based Prometheum was founded in 2017 by Aaron and Benjamin Kaplan, co-CEOs of the firm. The pair are also listed as attorneys at the financial services-focused law firm Gusrae Kaplan.

Subsidiaries of the company are notable for their registrations with the SEC and approvals from the Financial Industry Regulatory Authority.

In May, subsidiary Prometheum Ember Capital was the first firm to offer custody of digital assets as a qualified custodian after receiving FINRA approval to operate as a special purpose broker-dealer for digital assets.

In October 2022, its subsidiary Prometheum Ember ATS launched its SEC-registered alternative trading system offering digital asset trading, clearing, settlement, and custody.

What did Kaplan say?

In his prepared testimony, Kaplan argued that multiple frameworks provided by the SEC have “clearly laid out” a “compliant path forward for crypto in the United States.”

He even provided a glowing review of the regulator, calling it “the most capable financial markets regulatory agency in the world.”

Kaplan claimed crypto exchanges and custodians “are required to be regulated by the SEC” and slammed those not currently regulated as being “reckless, unlawful platforms.”

He went on to say existing securities laws and regulations apply to cryptocurrencies and those who argue for new crypto-specific laws are “simply not willing to comply.” He added new laws are “not in the best interest of the investing public or the blockchain industry.”

Related: Crypto industry ‘destined’ to be BTC-focused due to regulators: Michael Saylor

However, some have criticized the crypto firm, saying Prometheum doesn’t have much to show product-wise despite its years in business and regulator approvals.

During the hearing, Kaplan was asked by Representative Mike Flood if Prometheum offered trading for Bitcoin (BTC) or Ether (ETH), which together make up nearly 65% of the $1 trillion crypto market cap, according to CoinGecko.

Kaplan responded to both questions by saying it did not.

'Bizzare' claims

Meanwhile, theories about the company are are swirling on social media, with some alleging the firm's links to the Chinese Communist Party, pointing to 2019 SEC filings from Prometheum stating HashKey and Shanghai Wanxiang Blockchain are “strategic partners and joint venturers.”

Others have pointed to Prometheum’s team that includes former SEC and FINRA staffers. 

Cointelegraph contacted Prometheum to ask for a comment surrounding some of these claims.

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