The beginnings of a fully compliant Unitedย States cryptocurrency infrastructure couldย be forming on the industryโs fringes as a watchdog backed by the Securities and Exchange Commission (SEC) quietly issues wholeย lotย of approvals for corporations attemptingย to stick to the securities rulebook.
Pastย week, the Financial Industry Regulatory Authority (FINRA), an industry-funded oversight arm created by the SEC, announced that it approved its 1st broker-dealer with custody rights for digital assets securities โ revealed Tuesday to be Prometheum Ember Financialย resources LLC. And earlier theseย 30ย days, FINRA likewise gave OTC Markets Group a nod toย participateย inย the handful of firms that can legally provide trading for cryptocurrency securities.
The broker-dealer approval โ potentially an important milestone โ went to a cryptocurrency company, Prometheum Financialย resources, that was purpose-built to comply with SEC regulations under the assumption that almost all cryptoย tokens are securities under Unitedย States law. Aaron Kaplan, a securities lawyer who is the founder and co-CEO of parent company Prometheum Inc., stated the company will demonstrate that industry complaints about the absence of a path to Unitedย States compliance are mistaken.
โ Thereย is ofย course a way forward for cryptocurrency in the United States,โ Kaplan stated in an interview. Those complaining about a lack of regulatory clarity โwere attemptingย to put a square peg into a circle hole,โ he said.
Much of the cryptocurrency industry has accused the SEC of issuing impossible demands that corporations conform to longย term securities laws for registering exchanges, brokerages and the assets themselves. Itโs becoming SEC Chair Gary Genslerโs rhetorical refrain to call on cryptocurrency corporations to โcome in and registerโ or face enforcement actions for securities violations.
Unitedย States cryptocurrency platform Coinbaseย Cryptoย exchange (COIN), forย example, has been warned that an enforcement action is coming, and the company has pressed the agency in court on its unwillingness to provide crypto-specific regulations or guidance.
Cryptocurrency lobbyists have pleaded with Congress to eventuallyย pass a law setting up a tailored structure for Unitedย States digital assets markets. Onย theย otherย hand, lawmakers have so far been unable to make lasting progress on the numerous bills that have been introduced, and the uncertainty continuesย this year.
Inย theย meantime, Prometheum Financialย resources has not only been approved as a โspecial purpose broker-dealerโ that can take custody of customerโs cryptocurrency assets โ effective May 17 โ but likewise as an alternative trading system (ATS) for digital assets securities. The companyโs platform will go live in the third quarter, Kaplan said.
Its status as one of the 1st ATSs โ someย kind of exchange thatโs less intensely regulated than a โnational securities exchangeโ โ is now matched by OTC Markets, too.
OTC Markets, a well- established name in the trading of penny stocks and other securities outside of the major exchanges, is counting itself amongย the corporations โ essentially attemptingย to do things under what the SEC has put out there so far, as opposed to pushing back, saying we doย not fit under these rules,โ stated Cass Sanford, deputy general counsel, in an interview.
โItโs certainly going to be a long way until you have the more native cryptocurrency industry really get into this world,โ Sanford stated. โThere are still some things to work out.โ
Whatโs in a security?
Even as legal platforms of trading emerge, questions remain about what assets theyโll be able to trade. As Gensler contends, the vast bulkย of cryptocurrency assets are unregistered securities, and so are in violation of securities laws. The only exception he acknowledges isnโt a security is Bitcoinย (BTC), and its position outside of securities law likewise means the most widely-traded cryptocurrency investment canโt appear on a securities exchange.
โWeโre just attemptingย to be prepared in the event that we do get clarity on which things are and are not securities,โ Sanford said.
Kaplan, who wouldnโt isย still identify which securities he anticipates will change hands on his firmโs exchange, contends that his platform will be able to handle the numerous digital assets that have sought exemptions from certain securities requirements. And unlike a full-fledged exchange, an ATS doesnโt work with a company to โlistโ a security, but only links up buyers and sellers to trade assets that the Prometheum Capitalโs compliance operation decides meet the definition of securities.
He stated thatย implies investors could trade a cryptoย token even if the project that created it is vehemently denying itโs a security.
Sanford has a different perspective, saying that a tokenโs backers would have to make proper public disclosures before itย canย potentially be supported on the new ATS belonging to OTC Markets, which already handles 20 publicly traded crypto-linked securities. (These are asย ofย now wrapped in trust structures instead of trading directly.) Sheโs claimedย that cryptoย tokens couldย be able to qualify as over-the-counter equity securities.
Althoughย while such platforms work out how to meet securities requirements, the legacy cryptocurrency platforms are โquickly becoming obsoleteโ as they face Unitedย States regulatory pressures, Kaplan argued, because theyโd have to rebuild themselves to comply with securities laws.
His companyโs broker-dealer will likewise maintain custody of customerโs assets, which mayย be a particularly important point as the SEC considers a proposition that could require the financing advisers the agency oversees to keep customersโ cryptocurrency assets only with โqualified custodiansโ โ a term that typically includes SEC-registered broker-dealers. Itย canย potentially mean Prometheum would arguably control โthe only game in townโ if itโs the sole broker-dealer regulated as a cryptocurrency custody provider.
As for whether it can expect pushback for its alignment with Genslerโs view, Kaplan stated, โInvestors are looking for platforms that afford them the proper protections.โ And the institutions and retail investors his company expects to do business with will be drawn by the prices the company offers for its services, which Kaplan stated as โhyper-competitive.โ
