“We write to express our concerns regarding Prometheum, Inc.’s (Prometheum) recent announcement that its subsidiary, Prometheum Ember Capital LLC (Prometheum Capital), a Financial Industry Regulatory Authority (FINRA) approved Special Purpose Broker-Dealer (SPBD), will provide custody services for Ethereum’s token, Ether (ETH), later this month to institutional clients. In particular, we are concerned by the lack of transparency in the Securities and Exchange Commission’s (SEC) SPBD regime and the SEC’s failure to address Prometheum’s intent to custody an asset that the SEC and the Commodity Futures Trading Commission (CFTC) have recognized as a non-security digital asset. We urge you to clarify the SEC’s position with respect to a SPBD’s ability to custody non-securities, willingness to address SPBD non-compliance, regulatory classification of ETH, and position regarding Prometheum’s announcement.
“As you are aware, the agencies have an extensive public record identifying ETH as a non-security digital asset. There are multiple regulatory actions grounded in that position. Yet now, we are faced with an alarming scenario in which a SPBD has announced that it intends to offer custodial services for ETH under a regime that does not permit such activity. This action, if allowed to proceed, could have irreparable consequences for the digital asset markets.
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“Despite your insistence that most digital assets are ‘digital asset securities,’ that term continues to be undefined. Other regulators, intermediaries, and market participants disagree with your assertions, and have struggled to identify which digital assets are digital asset securities. Moreover, the SEC’s failure to propose a rule or provide comprehensive guidance that provides clear rules for the digital asset marketplace regarding asset classification has only exacerbated the uncertainty in the digital asset ecosystem. Compounding the uncertainty, the SEC has engaged in multiple enforcement actions, accusing certain digital asset trading platforms of failing to register as brokers, clearing agencies, and national securities exchanges (NSE) because they are transacting in digital asset securities.
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“Despite this history recognizing ETH as a non-security digital asset, you have consistently refused to acknowledge that ETH is not a security. In your March 2023 testimony before the House Committee on Financial Services you declined to answer multiple questions about whether ETH should be considered a commodity. Your unwillingness to clarify the treatment of ETH only exacerbates the confusion and uncertainty regarding ETH’s classification as demonstrated by the Prometheum announcement.
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“Your unwillingness to identify which digital assets are so-called digital asset securities has sown confusion even for SEC regulated entities. The SEC established temporary frameworks for broker-dealers to engage with digital asset securities both to facilitate trading as an alternative trading system (ATS) and to provide custodial services which were in place well before your arrival. In September 2020, the SEC’s Division of Trading and Markets issued a no-action letter (NAL) to FINRA establishing a framework for a registered broker-dealer to operate an ATS that trades digital asset securities, under certain conditions.
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“In order for Prometheum Capital to make its announcement that it will custody ETH and remain in compliance with the SEC’s SPBD regime, Prometheum Capital should have determined that ETH is a digital asset security and that the offer and sale of ETH is either registered as a security or qualifies for an exemption. However, ETH has not been registered as a security with the SEC, nor has the SEC indicated that the offer or sale of ETH satisfies the requirements of any exemption. Thus, it remains unclear how Prometheum intends to offer certain digital assets through its ATS or to implement procedures congruent with the SPBD framework. To date, Prometheum Capital has not provided any SPBD custodial services nor has Prometheum ATS operated as an ATS.
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“The regulatory treatment of ETH is not solely a matter of importance to the SEC, it directly implicates the CFTC and the commodity futures markets, as well. If the SEC determines that ETH is a digital asset security, CFTC registered commodity derivative exchanges may no longer be able to list and offer ETH Futures for trading as commodity futures products. The consequences of exchanges no longer offering ETH derivatives could have significant implications for existing ETH market participants. Not only would market participants lose access to an essential risk management tool, but such an action could also imperil the existing approved ETFs and result in significant price dislocation across the ETH market. More problematic, if the SEC determines ETH to be a digital asset security, then existing CFTC registered entities and registrants are potentially violating securities laws by offering security futures products absent registration pursuant to the security futures framework.
“The negative repercussions of the SEC implicitly or directly classifying ETH as a digital asset security will cascade throughout the digital asset marketplace both in the short and long term. The immediate impact on the ETH commodity derivatives markets is apparent. However, the broader implications for the digital asset markets may be that absent legislation, there will never be regulatory certainty upon which one can offer digital asset derivatives in the United States. This would have a chilling effect on U.S. digital asset markets, to the detriment of Americans who benefit from the robust U.S. digital asset markets and federal regulation of those markets.”
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