Ethereum custody by Prometheum to test SEC’s crypto securities stance—Here’s why

Prometheum Inc., a pioneering firm in the cryptocurrency sector, has announced its plans to launch a custody operation for Ethereum (ETH), marking a significant move as the only U.S.-registered crypto securities platform. This decision by Prometheum is set to test the Securities and Exchange Commission’s (SEC) perspective on whether ETH should be classified as a security. With the firm’s intention to expand its offerings to include a variety of other tokens before initiating trading operations in the second quarter of 2024, the industry is keenly observing how Prometheum’s compliance journey will unfold.

A bold move towards SEC compliance

Prometheum’s decision to start its custody services with Ethereum is not just a strategic choice given the cryptocurrency’s market cap and liquidity but also a potential litmus test for the SEC’s regulatory approach towards digital assets. The firm is the first to navigate the SEC’s compliance requirements to establish itself as a special-purpose broker-dealer and crypto custodian. Also, the firm aims to operate an alternative trading system, which, similar to a full-fledged exchange, operates under fewer compliance mandates. This move comes when the Prometheum has yet to generate revenue, having only recently cleared the regulatory barriers necessary to commence its custody services.

Prometheum’s co-CEOs, Aaron and Benjamin Kaplan, emphasized their commitment to servicing the crypto industry while adhering to U.S. securities laws. Prometheum’s approach signifies a critical test case for crypto regulation in the U.S., offering a potential blueprint for other firms aiming to operate within the legal framework set by the SEC. The outcome of Prometheum’s initiative is poised to either validate the feasibility of compliant crypto operations in the U.S. or highlight the challenges of meeting the SEC’s stringent requirements.

The regulatory implications of Prometheum’s custody of ETH

The choice of Ethereum as Prometheum’s first digital asset under custody brings to the forefront the ongoing debate about classifying cryptocurrencies as securities or commodities. Unlike Bitcoin, which the SEC has clearly stated does not fall under its jurisdiction, Ethereum’s status remains ambiguous. The Commodity Futures Trading Commission (CFTC) labeled ETH as a commodity, further complicating the crypto regulations for firms like Prometheum registered to custody crypto securities.

This situation further highlights the interplay between different regulatory bodies and the crypto industry’s need for clarity regarding the legal status of various digital assets.

The future of crypto custody and securities

As per the SEC’s proposed rule, registered investment advisers may only store their clients’ cryptocurrency assets with qualified custodians. If enforced, this could potentially lead to a significant boost for Prometheum. However, the list of qualified custodians usually includes only registered broker-dealers and banks. SEC Chair Gary Gensler has mentioned that the major crypto exchanges of today are likely not included in this list. The rule’s finalization is scheduled for April, but such timelines often tend to be too anxious.

As Prometheum embarks on this regulatory journey, the firm’s potential to serve as a qualified custodian for institutional investors is significant. With the SEC proposing rules that could mandate investment advisers to use qualified custodians for crypto assets, Prometheum positions itself as a compliant option for traditional financial institutions looking to enter the crypto space.

Moreover, Prometheum’s role in the debate around asset tokenization and the legal definition of crypto securities could have far-reaching implications. The outcome of ongoing court cases, including Coinbase’s challenge to the SEC, may further define the regulatory environment for digital assets.