A crypto trading firm has gotten FINRA approval. It hopes the SEC is next.

While crypto is in the spotlight, Prometheum hopes to trade blockchain securities — with regulatory approval in hand.

SEC headquarters in Washington

Prometheum co-CEO Aaron Kaplan is hoping to get SEC approval for his trading system.

Photo: Saul Loeb/AFP via Getty Images

Startup Prometheum said Wednesday it had received approval from FINRA to operate an alternate trading system, or ATS, for trading digital assets including blockchain-based securities.

Prometheum now needs to get approval from the SEC and then can begin trading, co-CEO Aaron Kaplan says. The approval for subsidiary Prometheum Ember ATS Inc., or PEATS, includes trading by accredited and non-accredited investors.

Trading on the Prometheum system would differ from current crypto exchanges in that the assets on the platform will all be regulated as securities and the system itself would be regulated — if the SEC approves.

And then there's the regulatory scheme it will operate under. Exchanges such as Coinbase in the U.S. sometimes fall under state money transmitter licenses, though some states like Alaska and California have taken the position that such licenses don't apply to crypto businesses, leaving them in a regulatory gap. SEC Chairman Gary Gensler has raised concerns about the lack of regulatory oversight of crypto exchanges.

An ATS is an SEC-regulated trading system, sometimes known as a dark pool. An ATS matches buyers and sellers of securities but is typically regulated as a broker-dealer, not an exchange.

PEATS will offer trading for both retail investors and professionals and provide automated know-your-customer and anti-money laundering checks, the company says. Anchorage Digital Bank, a chartered bank, is providing custody and settlement for the ATS.

Prometheum is one of several companies that have been building new systems to enable trading of digital assets.

Competitor tZERO also has an ATS for trading digital securities, which it says did the first trade of a blockchain-based security in 2016 and says it did $39 million in digital securities transactions in the third quarter of 2020., the online retailer which took a detour into blockchain businesses recently, is in the process of spinning tZERO off.

Prometheum sees itself as taking a different route than many crypto exchanges by focusing on getting regulatory approval first. Kaplan believes that many cryptocurrencies could be deemed securities by the SEC and thus end up needing to be traded on regulated exchanges.

"[I]f something's a security and deemed to be a security, then the only place that could trade it would have to be for registered securities — and places that are operating under the money transmitter laws aren't necessarily authorized to do so," Kaplan said.

Kaplan says he believes Prometheum is in a good regulatory position, citing Gensler's comments on crypto exchanges needing regulation.

The SEC has not made a wholesale indication of which digital assets are or aren't securities — though it has said that bitcoin and ether aren't. The SEC has filed a lawsuit against Ripple alleging that the token it backs, XRP, is a security.

Prometheum has been seeking this ATS approval for several years. It required an initial application to FINRA, followed by a back-and-forth with the industry self-regulatory body, an interview, a demonstration and follow-up, Kaplan said.

To help on the regulatory front, Prometheum recently hired Rosemarie Fanelli as chief regulatory officer. She previously worked for 13 years at FINRA and also worked for the NYSE.

While this sort of official sign-off is hard to get, there have been recent regulatory actions that have signaled more clarity for what Prometheum is doing, Kaplan says.

In September, a no-action letter from the SEC to FINRA indicated that broker-dealers could operate alternative trading systems for digital assets, provided they maintain $250,000 in net capital, don't settle trades and ensure that the assets are registered with regulators and that transactions comply with securities laws.

Issuers of crypto tokens can register the digital assets as securities with the SEC, but not many have done so, which could limit the offerings on Prometheum's ATS in the near term.

Prometheum, once it gets SEC approval, aims to be live "in the coming months," Kaplan said.


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