House Republicans Demand SEC Explain What's Up With Crypto Platform Prometheum

03/27/2024 05:35

As Prometheum Inc. nears an unprecedented moment in U.S. crypto history by beginning a custody operation that intends to hold customers' Ethereum tokens {{ETH}}, the industry's friends in Congress are demanding the Securities and Exchange Commission (SEC) explain what it means to do about this first U.S. special purpose broker-dealer (SPBD) for digital assets.

Influential House Republicans are demanding answers from Gensler on how ETH could legally be treated as a security by Prometheum.
A total of 48 members of Congress signed a letter to Gensler, expressing concerns about how listing ETH as a security could threaten the crypto industry.

"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," the Republican chairmen of the House Financial Services and Agriculture committees wrote in a letter to SEC Chair Gary Gensler, also signed by 46 other members of Congress. "This action, if allowed to proceed, could have irreparable consequences for the digital asset markets."

Prometheum had announced a plan to begin custody of ETH as a customer asset. The initial plan was to start in the first quarter of this year, though the launch is now likely to happen next quarter, a spokesman said on Tuesday.

Rep. Patrick McHenry (R-N.C.) and Rep. Glenn "GT" Thompson (R-Penn.), the chairmen of the two committees, and the other Republican lawmakers – many of whom have been staunch supporters of the crypto industry – argued in Tuesday's letter that ETH is not a security, making the asset illegal to handle by a securities firm like Prometheum.

The lawmakers also slammed Gensler's unwillingness to directly say ether is a security.

"Your unwillingness to clarify the treatment of ETH only exacerbates the confusion and uncertainty regarding ETH’s classification as demonstrated by the Prometheum announcement," the letter said.

An SEC spokesman declined to comment, saying Gensler would "respond to members of Congress directly," and the spokesman for Prometheum said company officials are still reviewing the letter.

ETH has represented a tug-of-war between the SEC and the Commodity Futures Trading Commission, which has openly declared ETH to fit into its commodities jurisdiction, much like bitcoin does. While the SEC in earlier days seemed to agree, agency officials later suggested the decision on ETH isn't yet clear, especially after the Merge, a 2022 code update that shifted Ethereum from a so-called proof-of-work consensus mechanism to a proof-of-stake one. Meanwhile, ETH futures products have traded on CFTC-regulated platforms, and the SEC approved ether futures exchange-traded funds (ETFs) to begin trading last year.

The SEC has reportedly been probing the nature of ETH and the firms tied to it, potentially readying an answer to whether it's a security or not in the regulator's eyes.

Prometheum itself also represents a potential turning point in the U.S. treatment of the crypto sector. Gensler has more than once offered up Prometheum as an example of a firm seeking to leap through the necessary regulatory hoops to handle crypto legally in the U.S. If the SEC allows Prometheum to operate as a custody provider and trading platform for tokens the firm concludes are securities, it undermines the industry's core argument that it's impossible for crypto firms to do business under existing SEC rules. If the SEC instead puts a stop to Prometheum's business, it could demonstrate that the agency's request for crypto firms to come in and register was hollow.

ETH is not registered as a security with the SEC, which the lawmakers suggest make it impossible to handle as a security for Prometheum. The company's leaders, though, have argued in the past that it's not their job to register the assets that'll be held and traded in their business.

Congress has been working on legislation to better map the regulatory road for crypto in the U.S., but while some legislation has moved closer to floor votes in the House of Representatives, the Senate has been more sluggish.

"Allowing one market participant and regulation by enforcement to dictate the future of digital asset regulation is unacceptable," the lawmakers argued in their letter.