The beginnings of a fully compliant United States cryptocurrency infrastructure could be forming on the industry’s fringes as a watchdog backed by the Securities and Exchange Commission (SEC) quietly issues whole lot of approvals for corporations attempting to stick to the securities rulebook.
Past 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 – revealed Tuesday to be Prometheum Ember Financial resources LLC. And earlier these 30 days, FINRA likewise gave OTC Markets Group a nod to participate in the handful of firms that can legally provide trading for cryptocurrency securities.
The broker-dealer approval – potentially an important milestone – went to a cryptocurrency company, Prometheum Financial resources, that was purpose-built to comply with SEC regulations under the assumption that almost all crypto tokens are securities under United 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 United States compliance are mistaken.
“ There is of course a way forward for cryptocurrency in the United States,” Kaplan stated in an interview. Those complaining about a lack of regulatory clarity “were attempting to put a square peg into a circle hole,” he said.
Much of the cryptocurrency industry has accused the SEC of issuing impossible demands that corporations conform to long term securities laws for registering exchanges, brokerages and the assets themselves. It’s becoming SEC Chair Gary Gensler’s rhetorical refrain to call on cryptocurrency corporations to “come in and register” or face enforcement actions for securities violations.
United States cryptocurrency platform Coinbase Crypto exchange (COIN), for 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 eventually pass a law setting up a tailored structure for United States digital assets markets. On the other hand, lawmakers have so far been unable to make lasting progress on the numerous bills that have been introduced, and the uncertainty continues this year.
In the meantime, Prometheum Financial resources has not only been approved as a “special purpose broker-dealer” that can take custody of customer’s cryptocurrency assets – effective May 17 – but likewise as an alternative trading system (ATS) for digital assets securities. The company’s platform will go live in the third quarter, Kaplan said.
Its status as one of the 1st ATSs – some kind of exchange that’s less intensely regulated than a “national securities exchange” – 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 among the corporations “ essentially attempting to do things under what the SEC has put out there so far, as opposed to pushing back, saying we do not fit under these rules,” stated Cass Sanford, deputy general counsel, in an interview.
“It’s certainly going to be a long way until you have the more native cryptocurrency industry really get into this world,” Sanford stated. “There are still some things to work out.”
What’s in a security?
Even as legal platforms of trading emerge, questions remain about what assets they’ll be able to trade. As Gensler contends, the vast bulk of cryptocurrency assets are unregistered securities, and so are in violation of securities laws. The only exception he acknowledges isn’t a security is Bitcoin (BTC), and its position outside of securities law likewise means the most widely-traded cryptocurrency investment can’t appear on a securities exchange.
“We’re just attempting to be prepared in the event that we do get clarity on which things are and are not securities,” Sanford said.
Kaplan, who wouldn’t is still identify which securities he anticipates will change hands on his firm’s 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 doesn’t work with a company to “list” a security, but only links up buyers and sellers to trade assets that the Prometheum Capital’s compliance operation decides meet the definition of securities.
He stated that implies investors could trade a crypto token even if the project that created it is vehemently denying it’s a security.
Sanford has a different perspective, saying that a token’s backers would have to make proper public disclosures before it can potentially be supported on the new ATS belonging to OTC Markets, which already handles 20 publicly traded crypto-linked securities. (These are as of now wrapped in trust structures instead of trading directly.) She’s claimed that crypto tokens could be able to qualify as over-the-counter equity securities.
Although while such platforms work out how to meet securities requirements, the legacy cryptocurrency platforms are “quickly becoming obsolete” as they face United States regulatory pressures, Kaplan argued, because they’d have to rebuild themselves to comply with securities laws.
His company’s broker-dealer will likewise maintain custody of customer’s assets, which may be a particularly important point as the SEC considers a proposition that could require the financing advisers the agency oversees to keep customers’ cryptocurrency assets only with “qualified custodians” – a term that typically includes SEC-registered broker-dealers. It can potentially mean Prometheum would arguably control “the only game in town” if it’s the sole broker-dealer regulated as a cryptocurrency custody provider.
As for whether it can expect pushback for its alignment with Gensler’s view, Kaplan stated, “Investors are looking for platforms that afford them the proper protections.” 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 “hyper-competitive.”