Prometheum’s upcoming Ethereum custody service sparks skepticism

Prometheum, the only U.S.-registered crypto securities platform, is set to debut an Ethereum custody service in March 2024. This service will be Prometheum’s first crypto offering, as reported by the global business magazine Fortune.

Prometheum has secured approval from both the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Now, the company aims to offer custody, clearing and settlement services to institutional clients, such as asset management firms, hedge funds, Registered Investment Advisors (RIAs), banks and other financial institutions, starting with Ethereum.

Promotheum’s decision to choose Ethereum as its inaugural custody product has ignited speculation about Ethereum’s security classification, influenced by previous hints from SEC Chair Gary Gensler.

This development could significantly impact the industry, potentially resolving the debate surrounding Ethereum’s legal standing status as a security offering. The SEC has remained ambiguous about its stance on Ethereum’s classification.

Former SEC Director of Corporate Finance William Hinman declared in 2018 that Ether did not qualify as a security. Gensler himself concurred in 2018, three years before assuming his role at the SEC.

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Many industry players now view Prometheum skeptically due to concerns over the suitability of existing securities laws for crypto regulation. The SEC’s lack of clear registration guidelines also adds to the skepticism.

Cryptocurrency exchange Gemini co-founder Tyler Winklevoss and Democrat US Congressman Ritchie Torres have also questioned the company’s six-year absence of product launches. Winklevoss also noted Prometheum’s staff’s background in SEC and FINRA.

However, legal experts cited by Fortune suggest that Prometheum’s launch of its custodial service could be a strategy to pressure regulators, particularly the SEC, to address the persistent ambiguity surrounding its classification. By operating within existing laws, Prometheum’s approach might compel the SEC to make a definitive ruling on Ethereum's legal status, a move that has been long awaited.

Institutional custodial offerings

Prometheum’s custody of ETH will be managed at a FINRA member firm and an SEC-registered broker-dealer. Prometheum also plans to expand its custodial offerings to include prominent security tokens and utility-driven coins, with further details forthcoming.

Co-CEO Aaron Kaplan underlined the initiative’s focus on compliance and regulatory diligence.

“Prometheum Capital’s custodial services, starting with ETH, are tailored to meet the stringent regulatory and compliance standards promulgated by the Federal Security Laws,” Kaplan said.

“Our unwavering commitment to compliance and investor safeguarding drives this milestone, signifying substantial progress towards establishing a new paradigm for blockchain-enabled market infrastructure.”

Additionally, Prometheum plans to broaden its offerings to include trading, clearing, and settlement services for both retail and institutional clients by the end of 2024. The goal is to establish a comprehensive one-stop-shop marketplace for all participants.

Prometheum, hailed by the SEC as a compliance model for the industry, faces scrutiny regarding its origins and connections to federal enforcement agencies. On May 17 last year, the company gained approval from the SEC-affiliated FINRA to function as a Special Purpose Broker-Dealer (SPBD).

Introduced by the SEC in 2021, the SPBD framework demonstrates the applicability of existing securities laws to crypto companies. Prometheum remains the sole recipient of this approval to date. This designation authorized the company to engage in crypto custody services.

Subsequently, on January 10, Prometheum Capital LLC, a Prometheum subsidiary, obtained FINRA approval to clear and settle crypto trades for its affiliate, Prometheum Amber ATS.

Prometheum Amber ATS gained FINRA approval as an ATS in July 2021 and commenced operations in October 2022. ATS denotes an “alternative trading system,” a non-exchange trading venue regulated less stringently than national exchanges.

The company interprets this as an authorization to market crypto products with fewer disclosure requirements. It lists assets its target market desires, leaving regulatory compliance to the asset issuers.