Prometheum has received the first regulatory approval to operate a special purpose broker-dealer for digital asset securities as the firm expects the sector to transition from its current non-compliance.

Aaron Kaplan, founder and co-chief executive of Prometheum, told Markets Media that the special purpose broker dealer licence marks a major step forward in the shift from the current non-compliant digital asset market.

He said: “We are transitioning from the current crypto ‘Wild West’ ecosystems to a crypto financial services ecosystem that is licensed under securities laws. I take the same position as Gary Gensler, SEC chairman, that federal securities laws are in general the best framework to regulate digital assets.”

In May this year a Prometheum subsidiary received approval from the FINRA, the US regulator, to operate as a special purpose broker-dealer for digital asset securities which permits Prometheum Capital to custody digital asset securities on behalf of retail and institutional clients. Prometheum said this status marks the first time that digital asset securities will be custodied in a FINRA member firm and a broker-dealer registered with the Securities and Exchange Commission which is subject to federal securities laws.

Kaplan described this as a major step forward in the maturity of the digital asset market which could kickstart a wave of institutional adoption by re-establishing investor confidence that was lost during 2022 following events such as the collapse of crypto exchange FTX.

“This is the first time that all the trading and custody activity currently occurring on non-compliant venues can migrate to a venue that operates a fair and orderly market,” Kaplan added. “There is proper segregation of customer funds and assets.”

Prometheum was founded in 2017 by a group of Wall Street attorneys with the aim of allowing digital assets to be traded under existing securities laws. The firm was also launched with the intention of supporting the entire lifecycle of a digital asset security. Last year the Prometheum ATS launched for institutional trading of digital assets. The alternative trading system is a FINRA member firm and SEC-registered, so has to provide regulated protections and pricing transparency.

As the first SEC-registered digital asset qualified custodian, Prometheum Ember Capital’s focus on the Federal Securities Laws provides customers with the protections they deserve.#regulation #crypto #digitalassetsecurities pic.twitter.com/hO4e6S95Ho

— Prometheum (@PrometheumInc) June 1, 2023

Kaplan continued that the custody licence also gives Prometheum an advantage as the SEC has proposed rules requiring investment advisors to keep crypto assets at a qualified custodian with a regulatory fiduciary duty.

“I would argue that legacy crypto firms will have to make a significant effort to obtain the proper licences and they will also have to undergo a significant tech rebuild,” he added.

Incumbent custodians are also entering the digital asset sector. For example, Standard Chartered and Northern Trust Custody have backed Zodia, an institutional-grade crypto custody solutions provider. Kaplan argued that he does see the incumbents as competition, but rather sees an opportunity for them to partner with Prometheum.

“Existing custodians want to bifurcate the traditional financial system from the digital economy to prevent certain systemic issues or contagion risk,” he said. “They may want to work with us.”

Federal regulation

Kaplan also believes there is a larger transition away from a licensing regime that operates on a state-by-state basis to a federal regulatory regime. Prometheum Capital is subject to the Securities and Exchange Act 15c3-3 Customer Protection Rule as required under federal securities laws.

On 2 June Patrick McHenry, chairman of the House Financial Services Committee, and Glenn “GT” Thompson, chairman of the House Committee on Agriculture, released a discussion draft of legislation providing a statutory framework for digital asset regulation which aims to to close existing authority gaps between the SEC and the Commodity Futures Trading Commission.

This discussion draft is a critical first step toward much-needed clarity for the digital asset ecosystem.

I encourage the public to provide constructive feedback to help us get this right.

Thanks to @CongressmanGT, @RepFrenchHill, and @RepDustyJohnson for your partnership. https://t.co/aPKXAMwluJ

— Patrick McHenry (@PatrickMcHenry) June 2, 2023

“Everyone should understand at this point that financial instruments , whether digital or traditional, are just regulated securities,” said Kaplan.”As SEC chairman Gary Gensler has said, time is running out for crypto exchanges to register under securities laws.”

This was highlighted on 5 June when the SEC charged Binance, which operates the largest crypto asset trading platform in the world and their founder, Changpeng Zhao, with 13 securities law violations.

The SEC alleges that while Zhao and Binance publicly claimed that U.S. customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their own controls to secretly allow high-value U.S. customers to continue trading on the Binance.com platform. The SEC also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please.

Gensler said in a statement: “We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law. As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied.”

Solana, polygon, cardano and other tokens are securities, says SEC in Binance lawsuit

— Frank Chaparro (@fintechfrank) June 5, 2023

Let's talk about and analyze the SEC vs. Binance lawsuit. Because I've never seen anything like this before. This is 136 pages of pure madness. One for the history books. ?https://t.co/4nUFdnNJpu

— Stephen Diehl (@smdiehl) June 5, 2023

Absolutely legendary quote here in this SEC complaint. https://t.co/tvqFwGCju0 HT: @lopezlinette pic.twitter.com/lBpfkRI0sp

— Joe Weisenthal (@TheStalwart) June 5, 2023