Crypto Securities Custody License? Practitioners "survive" in SEC supervision

As crypto headliners battle U.S. regulators over "impossible" demands, a humble rudimentary compliant crypto infrastructure appears to be taking shape.

Prometheum Capital, a start-up founded in 2021 that received approval to custody crypto securities, said it appears to have found an SEC-friendly path to operate as the SEC-backed regulator quietly seeks to comply with securities. The company under the regulations gave the green light.

Last week, the Financial Industry Regulatory Agency (FINRA), an industry-funded regulatory body created by the SEC, announced the approval of Prometheum Ember Capital LLC, the first brokerage with custody rights for digital asset securities, which allows Prometheum Capital to represent retail and Institutional clients have custody of digital asset securities, which the company sees as an important step toward establishing a corporate structure and license that will eventually allow its parent company, Prometheum Inc., to offer clients trading in cryptocurrencies.

Earlier this month, FINRA also gave the green light to OTC Markets Group, making it one of several firms that can legally offer trading in cryptocurrency securities.

The approval, awarded to crypto firm Prometheum Capital, could be a major milestone. The company was built to comply with the SEC's regulations (the SEC assumes that almost all tokens are securities under US law).

Securities lawyer Aaron Kaplan, founder and co-CEO of Prometheum Inc, said the company will prove that industry complaints about the lack of compliance paths in the United States are wrong.

Kaplan said in an interview: “In the US, there is clearly a path forward for the crypto industry. Those who complain about the lack of regulatory clarity are really “trying to put a square in a round hole.”

**Many crypto industry players have accused the SEC of making impossible demands for companies to comply with securities laws to register exchanges, brokerages, and assets. SEC Chairman Gary Gensler’s mantra is to call on crypto companies to “come in and register” or face enforcement action for securities violations. **

For example, U.S. cryptocurrency platform Coinbase (COIN), which has been warned of imminent enforcement action, has pressured the agency in court over its reluctance to provide cryptocurrency-specific rules or guidance.

Crypto lobbyists are imploring Congress to finally pass a law creating a tailor-made structure for the U.S. digital asset market. But uncertainty has continued this year as lawmakers have so far failed to make progress on many of the bills that have been introduced.

At the same time, Prometheum Capital was not only approved as a "special purpose broker-dealer" that can custody clients' crypto assets (effective May 17), but was also granted an Alternative Trading System (ATS) license for digital asset securities. The company's platform will go live in the third quarter, Kaplan said.

Prometheum, as one of the first ATS (an exchange with looser regulation than the "National Stock Exchange"), can be compared with OTC Markets.

OTC Markets Group (OTC Markets Group) is a private company that provides services to the OTC securities market in the United States. The group is headquartered in New York City. OTC securities are divided into three markets to provide investors with opportunity and risk information : OTCQX, OTCQB and Pink. Cass Sanford, deputy general counsel of OTC Markets, said in an interview: "We are actually doing things in accordance with the requirements of the SEC so far, rather than resisting. There is definitely still a long way to go before more local encryption industries are truly integrated. Let's go, there are still some things that need to be resolved."

**What do the securities laws require? **

Even with the emergence of legitimate trading platforms, questions remain about which assets they will be able to trade. As Gensler stated,** the vast majority of crypto assets are unregistered securities and thus violate securities laws. ** He acknowledged that the only exception that is not a security is Bitcoin, which also means that as the most widely traded crypto asset, Bitcoin cannot appear on a stock exchange.

“We’re just trying to get ready until we actually figure out what’s a security and what’s not,” Sanford said.

Kaplan, who has yet to identify which securities he expects to change hands on his firm’s exchanges, said the Prometheum Capital platform will be able to handle many digital assets seeking exemptions from certain securities requirements. Unlike full-fledged exchanges, ATS doesn't work with companies to "list" securities, but simply connects buyers and sellers of assets that a firm's compliance operations department deems fit the definition of a security.

That means investors can trade the token, even though the project that created it vehemently denies it is a security, he said.

Sanford took a different view, saying that backers of tokens must make proper public disclosures before they can be supported on a new ATS belonging to OTC Markets, which already handles 20 publicly traded cryptocurrency-related securities (currently listed as included in a trust structure, rather than being traded directly), she argues that tokens may qualify as over-the-counter equity securities.

Kaplan believes that while these platforms are working out how to meet securities requirements, traditional crypto platforms will "quickly become obsolete" when faced with U.S. regulatory pressure, as they must rebuild their business structures to comply with securities laws.

His firm’s broker-dealer will also have custody of clients’ assets, which may be especially important now that the SEC is considering a proposal that could require investment advisors regulated by the agency to only hand clients’ crypto assets to “qualified investors.” Custodian" - This term generally includes broker-dealers registered with the SEC. This could mean, if Prometheum is the only regulated broker-dealer + crypto custody provider, arguably the "only qualified player in the game".

As for whether it would face opposition from the crypto industry for aligning with Gensler's views, Kaplan said: "Investors are looking for a platform that provides them with appropriate protections. Institutional and retail investors who want to do business will be attracted to our services and prices." Attracted, I believe it is very competitive."