Gary Gensler’s Contradictory Vision for Regulated Crypto Brokers

During a recent session held by the House Financial Services Committee, various experts and insiders provided their testimonies, shedding light on the pressing matter of regulating digital asset markets.

The focal point of the discussion revolved around a pair of draft bills concerning the regulation of crypto market structure and stablecoin usage. However, the entire conversation took place against the backdrop of an ongoing lawsuit by the U.S. Securities and Exchange Commission (SEC) against Coinbase, a prominent American cryptocurrency exchange.

Prometheum’s Groundbreaking Path in Digital Asset Securities Market and Perspectives on Crypto Regulation

Prometheum Ember Capital LLC, a subsidiary of Prometheum Inc., recently became the first broker-dealer granted custody rights for digital asset securities approved by the Financial Industry Regulatory Authority (FINRA), an oversight body established by the SEC and funded by the industry.

Kaplan, who is not only a securities lawyer but also the founder of Prometheum Inc., shared his insights on the future course of crypto regulation in the United States.

Aaron Kaplan was the final witness to take the stand, representing Prometheum, a company incorporated in 2021 and expected to launch as an alternative trading system (ATS) and broker-dealer for digital asset securities in the third quarter of this year.

Unlike the majority of other witnesses, Kaplan shared a viewpoint that closely paralleled that of SEC Chair Gary Gensler. He emphasized the sufficiency of the current securities laws in effectively regulating cryptocurrency markets. Several lawmakers cited Prometheum’s platform as tangible proof supporting the notion that Gensler’s consistent call for exchange registration was indeed authentic.

However, for skeptics, Kaplan’s testimony inadvertently portrayed the SEC’s position as a classic example of bureaucratic hurdles, akin to an inescapable Catch-22. This depiction drew parallels to the famous term coined by novelist Joseph Heller in his work of fiction, “Catch-22.”

The term referred to a circular rule implemented by the U.S. government during World War II, intended to prevent soldiers from leaving the military. The rule stipulated that one could only be discharged if deemed mentally unstable. However, anyone desiring to leave the military was considered rational, thereby trapping them within the system.

Likewise, Gary Gensler’s SEC seemed to adopt a similar rationale when conceptualizing their envisioned framework for the cryptocurrency market. From this perspective, although the establishment of regulated crypto exchanges was permitted, they were prohibited from facilitating the direct purchase or sale of cryptocurrencies.

Representative Mike Flood (R-NE), expressing audible frustration, asked Kaplan two straightforward questions: Does Prometheum enable users to purchase and sell ether (ETH)? What about bitcoin (BTC)? In response, Kaplan curtly and somewhat sheepishly answered “no” to both queries.

Interestingly, Prometheum has not yet identified any assets it intends to offer, despite its website featuring an app showcasing tokens associated with various protocols such as Flow, Filecoin, The Graph, Compound, and Celo. However, these examples seem to be purely hypothetical at this stage.

The process of officially registering a blockchain token as a security remains ambiguous, potentially leading to a scenario where Prometheum becomes a formally registered digital asset marketplace that does not facilitate the actual trading of digital assets. Furthermore, Prometheum currently plans to exclusively cater to accredited investors rather than the general public.

Representative Flood argued that Prometheum’s limitations, particularly its extremely restricted offerings, highlight the inadequacy of the SEC’s claims that existing laws provide a viable pathway for crypto exchanges to register.

Flood asserted that Prometheum’s registration “does not address the core issue: There is not a consistent definition of a digital asset security within current law.”

Rethinking SEC’s Approach By Balancing Securities Laws and Crypto Asset Functionalities

The SEC’s regulatory approach has created a Catch-22 situation, forcing crypto exchanges to exclude popular digital assets from proper registration. Bitcoin and ether, the native token of Ethereum, lack clear issuers for SEC compliance.

Prometheum’s recent hearing highlighted another issue: its exclusive sales to accredited investors hinder broader adoption of crypto assets. Lawyer Coy Garrison pointed out that subjecting these assets to securities laws would burden network operations, rendering them ineffective.

Although Prometheum can sell tokens to institutions, without a legal pathway for everyday users, these tokens become valueless due to the absence of active participants. Imposing the requirement of going through a broker-dealer to purchase crypto assets introduces significant friction in the system, neglecting the tokens’ intended functionality within networks.

Critics argue that the SEC should establish classifications that better align with the unique nature of cryptocurrencies. While some assets may meet the securities definition according to the Howey Test, the current approach fails to consider the diverse functionalities and purposes of crypto assets.

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