Ethereum as a Security: Impact on Crypto Market

Prometheum, a New York-based digital assets platform, recently soft-launched its custody services for Ethereum, marking a significant step in the regulatory landscape of cryptocurrencies. Prometheum’s move is especially notable because it classifies Ethereum as a security under the supervision of the Securities and Exchange Commission (SEC). This development is a practical validation of SEC Chair Gary Gensler’s stance that the existing regulatory framework is adequate for overseeing the crypto industry.

Prometheum was founded by brothers Aaron and Benjamin Kaplan and emerged from relative obscurity in mid-2023 with the announcement that it had obtained a first-of-its-kind broker-dealer license. This license permits Prometheum to custody digital asset securities, a contentious issue in the crypto industry, which largely argues against treating cryptocurrencies as securities.

The crypto industry has been vocal about the need for regulatory clarity. Many industry leaders believe that most cryptocurrencies should not be classified as securities. However, Prometheum’s unique approach suggests that digital assets can be regulated under existing securities laws. The company argues that its special-purpose broker-dealer distinction and a license to operate an alternative trading platform enable it to offer crypto trading under the current SEC regulations.

Prometheum’s stance has not been without controversy. Aaron Kaplan’s appearance at a House Financial Services Committee hearing on digital assets was met with criticism from industry leaders. Critics argue that Prometheum’s approach is unworkable and that the company will struggle to launch products or attract customers. Despite this skepticism, Prometheum continued to advance its plans.

In February, Prometheum announced that it would make Ethereum available for custody, marking a significant milestone. While custody is just a preliminary step, it is essential for facilitating trading, as it provides a secure venue for holding assets that clients buy and sell. Prometheum’s model involves operating both the custodian and trading system under separate entities, with approvals from the SEC and the Financial Industry Regulatory Authority (FINRA), ensuring compliance with regulatory standards where other platforms like Coinbase have struggled.

The announcement of Prometheum’s custody services for Ethereum was met with apprehension within the crypto community. Many feared that the SEC might officially classify Ether as a security, a move that could have profound implications for the entire sector. These concerns were heightened when the SEC issued a Wells notice to Ethereum developer Consensys in late April, indicating potential regulatory action.

The launch of Prometheum’s Ether custody services was delayed until Friday, beyond its initial target of March. Aaron Kaplan explained that the product was soft-launched with a select group of companies, with plans for a full launch by early June. Full trading capabilities are expected within a quarter. Kaplan did not disclose the names of the companies involved in the pilot.

Prometheum’s custody launch is a significant test of its regulatory strategy. By providing custody services for Ethereum under the SEC’s supervision, Prometheum challenges the crypto industry’s long-held beliefs about the feasibility of trading cryptocurrencies within the existing regulatory framework.

The success or failure of Prometheum’s approach will have far-reaching consequences. If successful, it could pave the way for other cryptocurrencies to be traded under SEC regulations, fundamentally altering the landscape of the crypto market. Conversely, if Prometheum’s model fails, it may reinforce the industry’s argument that new, crypto-specific regulations are necessary.

Prometheum’s move also underscores the broader regulatory uncertainty surrounding cryptocurrencies. The SEC’s actions, such as the Wells notice to Consensys, suggest a more stringent regulatory approach that could impact other major cryptocurrencies and platforms. As the crypto industry continues to evolve, regulatory clarity will remain a critical issue, with companies like Prometheum at the forefront of this ongoing debate.

Ultimately, Prometheum’s launch of Ether custody services represents a pivotal moment in the intersection of cryptocurrency and regulation. By attempting to operate within the current legal framework, Prometheum is testing the boundaries of what is possible under existing laws. The outcome of this experiment will likely influence the future direction of crypto regulation in the United States and beyond.

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