Crypto entrepreneur Aaron Kaplan, added at the last minute to the witness list of a House of Representatives hearing on the industry’s future earlier this month, used his moment on the national stage to praise the U.S. Securities and Exchange Commission as “the most capable financial markets regulatory agency in the world.”
For an industry that has been fighting a multifront legal war with that agency over stakes as fundamental – in its view – as crypto’s right to exist in the U.S., the rhetoric of the co-CEO of Prometheum Inc. landed like a lit match in gasoline. No new crypto rules are needed, Kaplan said, and his company means to demonstrate it – even as issuers whose tokens it seeks to trade say no thanks.
When Kaplan held up his company as proof of a “compliant path forward,” though it hasn’t yet made any money or demonstrated the SEC will let it serve crypto customers, he drew criticism from across the industry. He piled on when he argued the established digital assets companies are flaunting the laws at investors’ peril.
Prometheum is an obscure startup with no track record, and crypto insiders are offering detailed explanations for why its model will run afoul of securities law and saying that its managers are glossing over key questions they can’t yet answer. But it’s also in a unique position to demonstrate whether the SEC’s “come in and register” rhetoric means something, after all.
“Over time, when given the opportunity, we’ll be able to prove that what we’re trying to do is in the best interest of the industry,” Kaplan said in an interview. “If you allow for a compliant mechanism for people to trade and custody digital assets, I think you provide the infrastructure that will allow for that next wave of institutional adoption.”
What Prometheum has that the others don’t is its recent registration as a “special purpose broker-dealer” for digital assets, allowing it to take custody of future customer’s crypto. It’s also one of the few crypto firms to register with the SEC as an “alternative trading system” (ATS), which is a less oversight-burdened version of a national exchange.
Industry figures and lawyers have stepped forward eagerly to explain why Prometheum’s plan to handle the trading of registered or exempted crypto securities won’t work. The SEC requires Prometheum, as a broker-dealer, to “conduct and document an analysis of whether a digital asset is a security offered and sold pursuant to an effective registration statement or an available exemption from registration.”
That demand makes Prometheum’s status “meaningless until there are enough crypto assets to trade“, said Ji Hun Kim, general counsel and head of global policy for the Crypto Council for Innovation. Its special purpose broker-dealer registration “is the equivalent of an empty vending machine.”
But the company says tokens that have been issued under arcane securities-law exemptions are fair game, and it’s already presented a short list of examples to the SEC of securities it can handle. In earlier statements, the company had said its ATS could offer Flow (FLOW), Protocol Labs’ Filecoin (FIL), The Graph (GRT), Compound (COMP) and the Celo platform’s CELO, for starters. Prometheum submitted those names to the regulator as assets it intended to support, and the SEC had an opportunity to reject them.
“There was no objection made,” Kaplan said.
Prometheum is waiting to leap one last SEC hurdle: Official sign-off to be able to clear and settle transactions, which Kaplan said he expects to come soon. Such an approval could represent a moment in crypto history in which the industry finds out if there’s a form of digital assets platform that will be allowed to operate under existing U.S. oversight.
If the agency lets Prometheum do what the company plans to do, it threatens the bedrock position of the crypto sector that its companies can’t do business under the SEC’s current interpretation of securities law. But if the agency puts a stop to Prometheum, it reinforces the argument that U.S. regulators are making it impossible to operate a crypto firm here.
The Prometheum question joins several others as potential turning points for crypto in the U.S., including the Ripple Labs Inc. court decision, the outcome of U.S. lawmakers’ wrangling over a crypto oversight bill and the fate of the SEC’s fights with Coinbase Global Inc. (COIN) and Binance.
After its broker-dealer approval, the company has been guarded about what digital asset securities will be traded when the platform goes live, though it had submitted the five token projects as examples in its ATS filings.
“I’m not trying to bring, like, the eye of Mordor on these tokens,” Kaplan said.
One of the most prominent of them, Filecoin, is itself objecting to the idea that the token FIL can be traded as a security.
“Filecoin is an open-source, decentralized file storage network with thousands of contributors worldwide, storing humanity’s most important information,” a spokesperson for Protocol Labs, the company behind Filecoin, told CoinDesk. “It is not a security.”
That pushback doesn’t matter to Prometheum’s business plan, Kaplan said, because he said an ATS doesn’t need to work with the issuer of an asset in order to list it.
“As an ATS, you can choose which assets you support based on the needs of your customers,” said Kaplan, who has worked as a securities lawyer.
And the SEC is already backing up the position that FIL and others – including FLOW – are securities, because it’s argued as much in its enforcement actions against other crypto companies.
An SEC spokesperson declined to comment on Prometheum’s status, or the agency’s views on tokens the company may seek to trade.
Kaplan hasn’t been overly specific about how his company will satisfy SEC disclosure demands regarding the assets it’ll handle. “We will meet all our disclosure requirements,” he said.
Industry critics argue that to be legitimate securities, issuers have to file certain updated information to the SEC, and a third party trading platform can’t do it for them. Marisa Tashman Coppel, senior counsel at the Blockchain Association, an industry lobbying organization, was among those contending that Prometheum’s position is bogus.
“Prometheum’s ATS will not be able to trade any tokens – despite their claims to the contrary – unless projects first register with the SEC,” she posted on Twitter.
Another crypto ATS – OTC Markets – agrees that a securities issuer has to provide the information itself. “As the market operator, our role is to determine that the issuer disclosure meets the requirements for public trading, but we couldn’t possibly generate that disclosure ourselves,” said Cass Sanford, deputy general counsel.
Crypto projects that are fighting against being labeled as securities, such as Filecoin, won’t be leaping forward to comply with securities regulations.
Prometheum currently employs about 50 people, Kaplan said, and it will have more capital needs as it grows. He said the company could be open to acquisition (“Capitalists will be capitalists,” he said), and a bigger firm grabbing its potentially valuable registration status could further amplify the urgency of what could happen with the company.
Meanwhile, Kaplan has been accused of being a puppet of SEC Chair Gary Gensler, widely seen by the industry as seeking to throttle U.S. crypto into lifelessness. When Kaplan suddenly appeared in the House hearing, the industry was abuzz with speculation that the SEC had put him there. He said it was the staff of Rep. Maxine Waters (D-Calif.) that invited him. He said he’s never met Gensler and has never had any contact with the SEC outside of the typical registration process.
A U.S. senator, Tommy Tuberville (R-Ala.), also accused his company of being a tool of Chinese investors. Kaplan responded, saying that while HashKey Group, the digital assets and blockchain arm of Chinese conglomerate Wanxiang Group, still owns about 20%, it has no access to the company’s data or technology. He said the SEC, which investigated and subpoenaed the company for information on this relationship, has recently sent a letter to Prometheum stating the question is resolved.
The individual owner with the biggest stake of Prometheum is Kaplan’s father, Martin Kaplan, who co-founded a securities law firm in New York. And Aaron Kaplan’s brother, Benjamin, is the other CEO. The three men’s stakes in the company represent the bulk of Prometheum, making it a kind of family business.
Aaron Kaplan has taken the role as public advocate for the company and has largely abandoned corporate diplomacy for contentious arguments, such as those he made in testimony on Capitol Hill or in a podcast debate this week with a lawyer who represents an investment firm, Paradigm.
“The investor protections of the federal securities laws provide a path forward for the industry to move beyond what occurred in 2022, which was really the result of people operating on unregulated financial intermediaries,” he told CoinDesk. “Give us an opportunity to show what we could do.”
UPDATE (June 30, 2023, 13:31 UTC): Adds SEC’s decline to comment.
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