McHenry, Financial Services Republicans Press Regulators Regarding Prometheum Special Purpose Broker-Dealer Approval
Washington,
August 15, 2023 -
The Chairman of the House Financial Services Committee, Patrick McHenry (NC-10), led Republicans on the House Financial Services Committee in sending letters to Financial Industry Regulatory Authority (FINRA) President and CEO Robert Cook and Securities and Exchange Commission (SEC) Chair Gary Gensler regarding the approval of Prometheum Ember Capital LLC as the first and only special purpose broker-dealer for digital assets.
The lawmakers are demanding transparency regarding the approval process for Prometheum and raising questions about the risks to national security posed by Prometheum’s reported ties to the Chinese Communist Party.
Read the full letter to FINRA President and CEO Cook here.
Read the full letter to SEC Chair Gensler here.
Read key excerpts from the letters below:
“In December 2020, the Securities and Exchange Commission (SEC) introduced a new class of special purpose broker-dealers (SPBD). This new regime was intended to allow for the custody of digital asset securities. Unlike other broker-dealers, SPBDs—if approved by the Financial Industry Regulatory Authority (FINRA)—can transact in as well as custody digital asset securities. For the first two years that the regime was effective, FINRA did not approve any SPBDs. Then, effective May 17, 2023, FINRA approved Prometheum Ember Capital LLC, a subsidiary of Prometheum, Inc. (Prometheum) as the first and only entity operating under the SPBD framework. Several other firms have sought approval under the SPBD framework but have not been granted approval by FINRA.
“The timing and circumstances surrounding the approval of Prometheum as the first SPBD raise serious questions. The approval comes as the Committee is considering addressing gaps in the regulation of digital assets. The Committee held a joint hearing just seven days prior to the approval between the House Financial Services Committee and the House Agriculture Committee entitled, ‘The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets.’ In that hearing, members discussed their plan to propose legislation on digital asset market structure. The legislation was ultimately released on June 2, 2023. The timing of the approval raises concerns that it was aimed at demonstrating that legislation is not needed because there is a workable regulatory framework for the custody of digital asset securities.
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“While Prometheum claims it is the silver bullet for regulated digital asset offerings, it has not yet served a single customer. It has also refused to make public the digital asset securities that Prometheum ATS would support on its platform. Since Prometheum is limited to digital asset securities, and the SEC has refused to provide any binding guidance on what digital assets are securities, it is unclear what assets would even be eligible. Furthermore, Prometheum is not currently able to perform clearing or settlement services, which would be required to operate as an alternative trading system. It is unclear why FINRA would have chosen to approve a firm with no operating history and no track record of serving customers over all the applications that it has received.
“Even more troubling, the circumstances surrounding Prometheum raise serious national security and data privacy concerns. In 2018, Prometheum and Shanghai Wanxiang Blockchain Inc. (Wanxiang) entered into an agreement to jointly develop blockchain trading software. While the agreement was later terminated, and Prometheum claims all software was independently developed, the involvement of a Chinese entity in technology development in the early stages of Prometheum raises serious concerns. Furthermore, Kaplan testified before this Committee that 20% of his company is owned by this Chinese entity. According to SEC filings, a representative of that entity, Feng Ziao, serves as a Director in Prometheum. Wanxiang has deep ties to the Chinese Communist Party (CCP).”
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