U.S. Congress Demands Clarity from SEC-FINRA Over Prometheum ETH Custody

Key Takeaways

On May 17, Prometheum launched a custody service for ETH as a security stirring up controversy 

Prometheum has long been criticised by crypto enthusiasts for parroting the SEC’s stance and arguing that a compliance pathway exists for crypto firms

Members of the United States Congress have expressed their dissatisfaction with the Securities and Exchange Commission’s (SEC) response to inquiries about the classification of Ethereum (ETH) and controversial crypto firm Prometheum’s intention to custody ETH. They have set a deadline of June 5 for the SEC to provide more detailed answers.

The dissatisfaction stems from a March 26 inquiry by 48 members of the House Financial Services and Agriculture Committees. The lawmakers, including House Financial Services Committee Chairman Patrick McHenry, and subcommittee heads Bill Huizenga and French Hill, are concerned about the SEC’s handling of Ethereum’s classification as a security rather than a commodity. They are also questioning Prometheum’s status as a Special Purpose Broker-Dealer (SPBD) and its plan to custody ETH.

Prometheum describes itself as the first crypto-centric broker-dealer to register with the SEC while being a member of the Financial Industry Regulatory Authority (FINRA). The firm states it is a market ecosystem for digital asset securities. However, lawmakers are worried that the SEC and FINRA, along with Prometheum, might be setting a problematic precedent.

“Prometheum’s announcement that it will offer custody services for ETH raises a number of questions regarding what are, and what are not, permitted activities for SPBDs,” the lawmakers wrote. They have asked SEC Chair Gary Gensler to provide all nonpublic communications and records exchanged between the SEC and FINRA concerning Prometheum’s SPBD application process and the regulatory classification of ETH.

Prometheum launched its custody service for ETH as a security on May 17, raising speculations over the regulatory status of the asset. In a previous letter, McHenry accused Gensler of sidestepping questions about Ethereum’s classification last year during congressional testimony. The letter also demanded clarity on how Prometheum intends to comply with the SEC’s framework for SPBDs, which was introduced in 2020 to facilitate the trading of digital asset securities.

Gensler responded to the March 26 letter by stating he was “not privy to any details of Prometheum’s future business plans.” However, the lawmakers believe it is highly likely that the SEC and FINRA discussed permissible activities for an SPBD during Prometheum’s application process. The congressmen have thus requested detailed records and communications regarding these discussions.

Prometheum has often been criticised by crypto enthusiasts for parroting the SEC’s stance and mirroring statements made by Gensler. Prometheum’s co-CEO Aaron Kaplan testified before Congress last year, aligning with the SEC’s stance that a compliance pathway exists for crypto firms, contrary to many other firms’ claims that compliance is unfeasible.

The House Financial Services Committee has previously described Prometheum’s crypto approach as “shady,” suggesting it is being used by the SEC to demonstrate that existing securities laws are adequate for crypto firms

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