Rep. Mike Flood, famous for being at the center of the congressional response to the sudden failure of Silicon Valley Bank in California, never hid his enthusiasm regarding the immediate federal government reaction to the potential financial crisis and now has turned to Prometheum Ember Capital.
Recently, he decided it was time to deal with the newest SEC’s explanation of the securities. In this video, recorded during the last Financial Committee meeting, Flood went on to explain why he thinks the claims from Prometheum Ember Capital that their SPBD approval is evidence of a clear path to regulatory compliance are absolute “nonsense.”
In May this year, Prometheum became first crypto company to be approved by SEC , FINRA as special-purpose broker-dealer. First he read a question from a comment letter that Prometheum sent in response to the SEC’s in December, 2020, where the definition of a digital asset security as used in the proposal stated it is “a digital asset that meets the definition of a security under the federal securities laws”.
Flood claimed that this definition makes it difficult for the market to establish whether digital assets qualify as securities.
“As a result, we believe the clarity is needed to understand the regulatory framework they must comply with, and quote that was in a letter dated April 26th from Prometheum, specifically signed by Benjamin s Kaplan the CEO of the company”, he said.
Flood went on to say he offered the letter into the record without objection because such concerns were the exact same concern the Committee has been hearing from witnesses for a long time.
“How can a broker-dealer register if they don’t know which assets are a security and which are not?” asked Flood.
He stressed that it makes the same argument that other firms have made that the lack of clarity from the SEC puts an undue burden on the industry.
“Mr. Kaplan, in your testimony, you were very confident that no new legislation is needed in the digital asset space. To clarify this question, what has changed between the date of this letter in 2021 and when your firm called for clarity and now what has changed?” Flood asked.
He asserted that for more than two years, there’s been additional enforcement actions and statement by the SEC, which have clarified any questions regarding the designation of a digital asset as a security.
“Mr. Kaplan Prometheus’s website says that Prometheum supports ‘many tokens that mostly trade on crypto exchanges’. I’d like to dig in on that just a little bit. Can Prometheum customers trade in either? If your answer is yes, please explain how not currently can Prometheum customers trade in Bitcoin. If your answer is yes, please explain how,” Flood affirmed.
He then stressed that, given that either Ether and Bitcoin, make up more than 60% of the digital asset market, “if the current system is working, why can’t Prometheum’s customers trade the most popular and widely used digital assets regulation and new custodians should take a crawl, walk, run approach and essentially they will proceed to add additional assets and abilities as time goes on”.
He then pointed out that Prometheum special purpose broker dealer license does not address the core issue because there is not a consistent definition of digital asset security within current law.
“This point was made obvious when Chair Gensler could not say definitively whether Ether is a digital asset security when asked by Chairman McHenry in this very room a couple of months ago. In other words, that same question that Prometheum themselves raised in their 2021 comment letter is still unanswered,” Flood mentioned.
He concluded that that is exactly why legislation is needed.
“That’s the problem that the chairman’s bill works to solve, to testify in front of our committee that your company’s charter, which only allows for trading in a very so small subset of assets, is evidence that no legislation is needed. Just doesn’t make sense. If anything, the fact that Prometheum customers cannot trade some of the most popular digital assets is an illustration of the broader problem. Mr. Kaplan, I yield back,” Flood resumed.
In May this year, the Financial Industry Regulatory Authority (FINRA) gave Prometheum Ember Capital permission to act as a special purpose broker-dealer (SPBD) for securities backed by digital assets. Prometheum, therefore, became authorized to custody digital asset securities for institutional and retail clients.
In a statement, Prometheum co-CEO Aaron Kaplan then said:
“Digital asset investors in the U.S. are currently custodying cryptocurrencies that are securities through platforms that don’t offer the same SEA 15c3-3 [Rule] customer protections required by the federal securities laws.”
In the recent series of events, the largest cryptocurrency exchange in the US, Coinbase, was being sued by the SEC for operating as a “unregistered broker, exchange, and clearing agency” in contravention of US securities laws.
The regulator’s primary defense rests on the claim that Coinbase’s crypto tokens are basically securities, the exchange of which is rigorously governed by US law.
However, it seems that nevertheless Prometheum tried to play by the SEC’s rules – it still isn’t enough.