© CoinDesk Courtesy of the US Securities and Exchange Commission (Jesse Hamilton / CoinDesk)As a regulator backed by the Securities and Exchange Commission (SEC), the beginnings of a fully interoperable crypto infrastructure in the US could take shape at the edge of the industry, granting important permissions to companies trying to comply with the securities regulatory framework.
Last week, the Financial Industry Regulatory Authority (FINRA), the industry-funded regulator created by the Securities and Exchange Commission, announced that it had licensed the first broker-dealer with custody rights over digital assets; Promethium announced Tuesday that it is Ember Capital LLC. . And earlier this month, FINRA allowed the OTC Markets Group to join a handful of companies that can legally facilitate the trading of cryptocurrency securities.
The broker-dealer approval, a potential milestone, came from Promethium Capital, a cryptocurrency firm that was created specifically to comply with US SEC regulations and considers nearly all tokens to be securities under US law. Securities attorney Aaron Kaplan, founder and CEO of Promethium Inc., said the company will refer to industry complaints about the lack of a US compliance path.
“It is clear that cryptocurrency in the United States has a way to go,” Kaplan said in an interview. According to him, those who complained about the simplicity of the regulation were "trying to fit a square stick into a round hole".
Much of the crypto industry has been accusing the SEC of requiring companies to comply with long-standing securities laws when registering exchanges, brokers, and assets. SEC Chairman Gary Gensler's call for crypto companies to "register" or face penalties for securities violations has become a rhetorical imperative.
For example, US cryptocurrency exchange Coinbase (COIN) has been warned of imminent enforcement action, and the company has taken legal action with the agency for failing to issue crypto-specific rules or guidelines.
Cryptocurrency lobbyists have called on Congress to pass legislation that would finally create a unified framework for US digital asset markets. However, lawmakers have failed to make steady progress on many of the bills introduced so far, and uncertainty remains this year.
At the same time, Promethium Capital has established itself not only as a “specialized broker-dealer” that can monitor client cryptocurrencies, but also as an Alternative Trading System (ATS) for digital assets for securities. Kaplan said the company's platform will launch in the third quarter.
Its status as one of the first automated trading companies, a type of exchange less regulated than the National Stock Exchange, is now being embraced by OTC markets.
OTC Markets, a well-established company that trades penny stocks and other securities outside of the major exchanges, is "one of the companies that is really trying to do what the SEC has done so far. We're going to stick to those rules," Deputy Attorney General Cass Sanford said in an interview.
“Of course, we still have a long way to go before we have more homegrown crypto industries in this world,” Sanford said. "There is still something to work on."
Even with the advent of legitimate trading platforms, the question remains what assets they can trade. As Gensler argued, the vast majority of cryptocurrencies are unregistered securities that violate securities laws. The only exception it accepts is that the securities are bitcoins, and their off-securities law status means that the most traded cryptocurrency is not seen on exchanges.
"We just try to be prepared when we find out which products are securities and which are not," Sanford said.
Kaplan, who has not yet decided which securities he expects to trade on his company's exchange, said his platform can handle a number of digital assets that require exceptions to some securities requirements. And unlike a full exchange, an ATS does not work with a company to "list" securities, but Prometheum Capital's matching process matches buyers and sellers to trade assets that it believes meet the definition of a security.
This means that investors can sell a token even if the project that created it categorically denies that it represents a security.
Sanford has a different view. He says backers of the tokens must provide the necessary information before receiving support for the new ATS, OTC Markets, which already operates 20 publicly traded cryptocurrency securities. (It is currently kept in storage facilities and not sold directly). He said the tokens can be classified as OTC securities.
Even as these platforms learn to comply with securities requirements, Kaplan said, legacy cryptocurrencies are “rapidly becoming obsolete” as they face pressure from US regulations and must reinvent themselves to comply with securities laws.
The broker-dealer of his firm will continue to hold client assets, which could be especially important as the SEC considers a proposal that would require investment advisors regulated by the agency to hold clients' cryptocurrencies only with "qualified custodians." These usually include brokers and dealers registered with the Securities and Exchange Commission. This could mean that Prometheum will undoubtedly control “the only game in town” as it is the only broker that is regulated as a cryptocurrency provider.
On whether Gensler can expect to adjust to an economic downturn, Kaplan said: Investors are looking for platforms that will give them the protection they need. Both the institutional investors and individual investors his firm wants to do business with are price driven. The company offers services that Kaplan describes as "very competitive".