Amidst industry challenges with U.S. regulators, Prometheum Capital and other firms successfully obtain approvals for handling crypto securities.
A potentially compliant crypto infrastructure is emerging in the United States, with a regulatory body supported by the Securities and Exchange Commission (SEC) granting important approvals to companies aiming to follow the rules for securities.
Recently, the Financial Industry Regulatory Authority (FINRA), which is a regulatory body funded by the industry and established by the SEC, made two noteworthy announcements. First, it granted approval to Prometheum Ember Capital LLC to become the first broker-dealer with custody rights for digital asset securities. Second, it also approved OTC Markets Group to join the select few firms authorized to offer trading services for crypto securities.
A significant achievement occurred when Prometheum Capital, a crypto firm designed specifically to adhere to SEC regulations, received approval as a broker-dealer. This milestone is crucial because it operates on the belief that most tokens are considered securities according to U.S. law. Aaron Kaplan, a securities lawyer and the founder/co-CEO of Prometheum Inc., stated that the company will prove that the industry’s concerns about the lack of a compliance pathway in the United States are unfounded.
According to Kaplan, there is a clear path for crypto in the United States. In an interview, he mentioned that those who complained about the regulatory uncertainty were attempting to fit a square peg into a round hole, meaning they were trying to apply the wrong approach.
Many in the crypto industry have accused the SEC of imposing extremely challenging requirements on companies, asking them to comply with existing securities laws when registering exchanges, brokerages, and the assets themselves. SEC Chair Gary Gensler has repeatedly urged crypto firms to “register and comply” or face legal consequences for violating securities regulations.
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Coinbase, a popular U.S. crypto platform, has received a warning of an impending enforcement action. The company has taken legal action, urging the agency to provide specific rules or guidance specifically tailored to the crypto industry.
Lobbyists representing the crypto industry have urged Congress to pass a dedicated law that establishes a framework for digital asset markets in the United States. However, lawmakers have faced challenges in making substantial progress on the numerous bills introduced thus far, resulting in ongoing uncertainty in the industry this year.
In the meantime, Prometheum Capital has received approval to function as a “special purpose broker-dealer,” allowing them to securely hold customers’ crypto assets starting from May 17. Additionally, they have been authorized as an alternative trading system (ATS) for digital asset securities. Kaplan mentioned that the company’s platform will become operational in the third quarter.
Prometheum Capital’s status as one of the early alternative trading systems (ATSs), which are exchanges subject to less stringent regulations compared to “national securities exchanges,” is now shared by OTC Markets as well.
OTC Markets, a renowned platform known for trading penny stocks and other securities outside of major exchanges, is positioning itself as one of the firms actively working within the framework set forth by the SEC, rather than resisting and claiming non-compliance. Cass Sanford, deputy general counsel at OTC Markets, expressed this sentiment during an interview.
According to Sanford, it will take a considerable amount of time before the native crypto industry fully integrates into this regulated environment. He acknowledged that there are still certain aspects that need to be resolved or addressed before reaching that point.
What does the term “security” entail?
“We’re simply making preparations in case we receive clear guidance on which assets are considered securities and which are not,” Sanford explained.
Kaplan, who has not disclosed the specific securities expected to be traded on his firm’s exchange, believes that their platform will be capable of accommodating various digital assets that have sought exemptions from specific securities regulations. Unlike a traditional exchange, an alternative trading system (ATS) does not engage in the process of “listing” a security. Instead, it connects buyers and sellers to trade assets that Prometheum Capital’s compliance operation determines to meet the criteria for being classified as securities.
He explained that this implies investors would have the opportunity to trade a token, even if the project responsible for its creation strongly denies it being classified as a security.
Sanford holds a different viewpoint, stating that the supporters of a token would need to make appropriate public disclosures before it could be listed on OTC Markets’ new alternative trading system (ATS). OTC Markets already manages 20 publicly traded securities linked to cryptocurrencies, although they are presently traded through trust structures rather than directly. She has argued that tokens could potentially meet the criteria to be classified as over-the-counter equity securities.
As these platforms strive to meet securities regulations, Kaplan argues that traditional crypto platforms are rapidly becoming outdated due to the regulatory pressures in the United States. He explains that these platforms would essentially need to reconstruct themselves in order to comply with securities laws.
Prometheum’s broker-dealer will also be responsible for safeguarding customer assets, which is significant considering the SEC‘s proposal that may require investment advisers to keep customers’ crypto assets exclusively with “qualified custodians,” typically SEC-registered broker-dealers. This suggests that if Prometheum remains the only regulated broker-dealer acting as a crypto custody provider, they could potentially have a monopoly in this aspect of the industry.
When asked about potential opposition to their alignment with Gensler’s perspective, Kaplan responded by saying, “Investors are seeking platforms that provide them with adequate safeguards.” Additionally, the competitive prices offered by Prometheum for their services are expected to attract both institutional and retail investors who will be conducting business with the company.
Important: This article is intended solely for informational purposes. It should not be considered or relied upon as legal, tax, investment, financial, or any other form of advice.
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