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The definition of “digital asset securities” is a highly sensitive topic within the crypto industry.
At the center of this hotly debated topic is a crypto trading and custody company named Prometheum, which has sparked the ire of the crypto faithful by labeling several cryptocurrencies, including Ethereum (ETH), as “digital asset securities.”
Who is Prometheum, and why is Prometheum one of the most controversial companies in crypto? Let’s find out.
Key Takeaways
- Prometheum received a Special Purpose Broker-Dealer license to custody digital asset securities in 2023.
- The company uses a blockchain-powered platform for the trading, settlement, and custody of digital asset securities
- Blockchain Association was concerned that the SEC may have pressured the FINRA to grant the SPBD license to Prometheum.
- Congress members demanded an explanation on how a digital assets securities broker-dealer was providing custody services for a digital commodity like ETH.
Who is Prometheum?
Prometheum is the first and only company in the US to receive a Special Purpose Broker-Dealer (SPBD) license to custody digital asset securities from regulator Financial Industry Regulatory Authority (FINRA).
The company received this “first-of-its-kind” license in May 2023.
In 2024, Prometheum expanded its business to include clearing and settlement of digital asset securities trades. The company announced plans to make trading and clearing services available to retail and institutional clients.
The digital asset securities broker sparked controversy when it disclosed plans to launch an institutional custody service for ETH in February 2024.
In August 2024, Prometheum announced the addition of “digital asset securities” Uniswap (UNI) and Arbitrum (ARB) to its custodial platform.
The company uses a blockchain-powered platform for the trading, settlement, and custody of digital asset securities
As of late August 2024, Prometheum has not yet launched its custodial services to institutional clients. The company pushed back the launch date from the first quarter of 2024 to the third quarter of 2024.
Blockchain Association Urges Investigation into Prometheum’s Special License
In July 2023, Blockchain Association wrote a letter to Securities and Exchange Commission (SEC) Inspector General Deborah Jeffrey requesting an investigation into how Prometheum received a “first-of-its-kind license” to operate as an SPBD.
Blockchain Association — a nonprofit organization dedicated to promoting a pro-innovation policy — was concerned that the SEC may have pressured FINRA to grant Prometheum the SPBD license.
The organization raised doubts over SEC chair Gary Gensler’s intention to use Prometheum and the SPBD licensure process to spread “the false narrative that the law is already clear with regard to digital asset securities.”
Over the past few years, the SEC and the Commodity Futures Trading Commission (CFTC) have sought to expand their jurisdiction over the cryptocurrency market.
CFTC chair Rostin Behnam has expressed openness to discussing the new crypto-specific regulation. In contrast, the SEC, under Chair Gensler, has repeatedly cited old legal frameworks such as the Howey Test to label numerous cryptocurrencies as “unregistered securities” in its lawsuit against crypto exchanges Binance, Coinbase, and Kraken.
For those that didn’t stick around until the end of the @FinancialCmte hearing today, this exchange between @USRepMikeFlood and @PrometheumInc CEO Aaron Kaplan is an absolute must-watch.
Flood explicitly lays out why Prometheum’s claims that their SPBD approval is evidence of a… pic.twitter.com/yCDDKHiLea
— Alexander Grieve (@AlexanderGrieve) June 13, 2023
In the letter, the Blockchain Association alleged the SEC granted Prometheum a “sweetheart” deal in exchange for supporting the SEC’s crypto policies.
“Prometheum’s licensure comes at a time when other companies in the digital asset space have sought SPBD licenses based on legitimate business models, yet those license applications have either been denied or perpetually delayed,” said the Blockchain Association.
“Although the licensure itself may not raise ethics concerns, the facts surrounding it are concerning. Prometheum has no working product. It lists no assets, and any plans it may have to list assets in the future remain unclear,” added the Blockchain Association.
Congress Members Demand Explanation from Gensler
In March 2024, 48 members of the House Committees on Agriculture and Financial Services wrote a letter (PDF) to SEC Chair Gensler demanding an explanation for how Prometheum was providing custody services for ETH.
Congress members argued that the SEC and the CFTC have “long-recognized” ETH as a digital commodity, citing the approval of CFTC-regulated ETH commodity futures products as a reference.
“Your unwillingness to clarify the treatment of ETH only exacerbates the confusion and uncertainty regarding ETH’s classification as demonstrated by the Prometheum announcement,” read the letter.
The letter added that Prometheum should determine that ETH is digital asset security before offering custodial services for the world’s second-most valuable cryptocurrency to stay compliant with the SEC’s SPBD regime.
China Ties Draw Scrutiny
Prometheum has also come under fire for its close ties with China-based companies like HashKey Digital and Shanghai Wanxiang Blockchain.
Both companies helped Prometheum develop the firm’s blockchain technology and smart contract system.
SEC filings also showed that HashKey bought over 68.8 million shares in Prometheum in 2018.
The Bottom Line
Luckily for the crypto industry, clarity over the classification of whether a crypto is a security or a commodity is on the horizon.
The U.S. House of Representatives passed a crucial crypto bill called the FIT21 bill in May 2024 which looks to clearly define cryptocurrencies and set clear boundaries.
The bill be sent to the US Senate for a vote next.
