The Breakdown - Senators Question Prometheum's Ties to CCP

Episode Date: July 11, 2023

NLW covers the latest in the Prometheum saga as Senator Tommy Tuberville and a handful of others have sent a letter to SEC Chair Gary Gensler and others asking for an investigation around Prometheum's recent Congressional testimony and their alleged ties to the Chinese Communist Party. Also, is "dox to earn" the new narrative?  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, July 11th, and today we are talking about the latest in the Prometheum saga, as well as a very, very weird event from yesterday on crypto Twitter. Before we get into that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation. Come join us on the Breakers Discord. You can find a link of the show notes. We're going to bit.L.Y slash breakdown pod. Today, my friends, is weird.

Honestly, these are the types of stories that get people to just disengage with this industry a little bit. But if you are listening at this point, you are the definition of enfranchised, so here we go. We're going to start with Prometheum. And the hyper TLDR on Prometheum is that it is nominally a trading platform

that was trotted out as an example by the SEC of how a crypto firm could register. In fact, their CEO even testified before Congress recently. However, when pushed, it didn't actually seem like Prometheum could sell crypto at all because the platform couldn't sell commodities and securities at the same time, all of which sort of dramatized the need for a different regulatory regime. Now, the range of opinions in the crypto community had, on the one hand, that they were a convenient tool for the SEC to use, versus being a straight-up SEC or CCP plant, as you will see. Now, we released an entire podcast covering that scandal on June 17th if you want to get the full details. But by way of background before we get to the update in the story,

and putting a little bit more meat on this bone, Prometheum is a company that was among the first to obtain FINRA registration as a special purpose broker dealer with crypto assets. Prometheum CEO Aaron Kaplan did a round of media appearances holding up Prometheum as an example of how crypto exchanges could be compliant with existing securities regulations. Their pitch was that the existing large players in the industry simply didn't want to come into compliance with the existing rules, a line that you've heard from Gensler time and time again. Now, of course, the stakes were raised a few weeks ago when Kaplan appeared on a congressional hearing panel, speaking to just how workable and reasonable current SEC

crypto regulations are. The hearing had been intended to act as an exploration of crypto legislation currently being considered, and Kaplan's testimony essentially provided an echo of the SEC talking points that no further legislation is not. necessary. Now, outside of just the fact that they were parroting Gary Gensler's message almost exactly, the hearing itself was even weirder than that. At times, Kaplan's answers to question appeared to be read verbatim from prepared notes, and he was observed passing messages with someone seated in the front row. As you'll know, if you listen to that original episode, his testimony gathered a massive amount of attention from the crypto industry for just how bizarre and out

of consensus it was. And when people dug in, industry figures uncovered numerous strange details about Prometheum itself. The major point was that despite obtaining registration to operate, it appeared the firm didn't have an obvious business model or any readily identifiable customer base. Indeed, in a subsequent interview, Kaplan struggled to identify clearly which, if any, assets would be legal to offer on an exchange launched under this registration. So, again, this got us to the speculation that either Prometheum were being propped up as an example of a compliant exchange to undermine legislative efforts around crypto, or that Prometheum executives were taking advantage of that narrative for promotional reasons. And in either case, the entire story was

extremely bizarre. Now, what wasn't covered quite so extensively at the time were Prometheum's ties to Chinese firm Shanghai-Wang-Shing blockchain and potentially to CCP officials. On Monday, however, Alabama Senator Tommy Tuberville, along with five Republican colleagues, published an open letter to Attorney General Merrick Garland and SEC Chair Gary Gensler, urging an investigation into Prometheum specifically around those ties. In his letter, Tuberville says that Prometheum, quote, may have provided false testimony to Congress or violated U.S. securities laws. What he's referring to is written testimony from Kaplan that discusses the Wangshing Partnership.

Kaplan wrote that the two firms collaborated on a blockchain trading system in December 2018, but that after a year, Prometheum decided the development was unviable and began to independently developed the platform. Kaplan claimed that, quote, all servers, code, data, and proprietary technology were created independently of Wang Xing and its affiliates. Prometheum does not use any resource, code, or other assets from Wang Xing, or its affiliates in any of its systems. Tuberville points out that this should mean that reliance on Prometheum's Chinese partners

would have concluded by December 2019. To the contrary, however, Prometheum's SEC filings in following years repeatedly referenced Wang Xing and its subsidiary hash key. In December 2020, for example, Prometheum disclosed that if they, quote, were to lose the services of Wang Xing, it could be difficult or impossible to replace them, and the loss of them could have a materially adverse effect on the company's operations and financial conditions. In June 2021, an offering circular from Prometheum filed with the SEC states, quote, we are conducting our development activities with our strategic partners and joint venturers, hashkey, and Wang Xing. Given this, Tuberville asks in his letter, quote, if Prometium began developing its own technology platform totally independent, of its China-based CCP-tied partners in December 2019, as Mr. Kaplan attempted to lead Congress to believe in his congressional testimony, why was this not made clear in Prometheum's SEC filings? Tuberville notes that Kaplan has not been shy about promoting his firm's ties with Wang Xing. For example, at a 2021 conference in Singapore, Kaplan stated that, quote,

they're not a partner, they're our co-founder, and we work handed hand with them, and leverage their excellent resources and expertise. We really feel that we can achieve our business plan in an efficient and intelligent manner. Now, wrapping up, Tuberville highlights the severity of this apparent misrepresentation closing his letter, urging action from the DOJ and the SEC. Quote, making false statements to Congress is a crime. Submitting false or misleading statements in SEC filings constitute securities fraud. As we know you will agree, the inconsistencies in Prometheum's statements to Congress and

the SEC is a matter that deserves thorough review, as does Prometheum's continued membership in FINRA and registration with the SEC. Basically, the point that Tuberville is making is that Prometheum is lying one way or another. They're either lying to Congress with their testimony, or they're lying to the SEC with their disclosures. Obviously, either of those would be a big deal. However, if you really want to understand why this issue has captured Senator Tuberville's attention, it's really about allegations of Wang Xing's affiliation with the Chinese Communist Party. In an op-ed published in the Wall Street Journal last month, Tuberville laid out his evidence for this connection.

He claimed that, quote, Wang Xin Group was founded in 1969 by Liu Guangkio, a former senior Communist Party official. In 2021, the party's central committee posthumously named him a national, excellent Communist Party member. The official press release commented that Comrade Liu always listened to the party and follow the party, and it included a quote from President Xi Jinping, noting that Liu quote, always actively accomplished all that is advocated by party committees and governments at all levels. Wangshin Group is now led by Liu Guangzhou San, Liu Weiding. The same Communist Party press release expressed confidence that Wangshing group's current leadership, quote, will carry forward and practice the loose spirit, always listen to the party and follow the party, end quote.

Now, to put a point on this, Wangshing is not some scrappy little crypto firm. This is a massive multinational conglomerant with prominence primarily in the automotive sector. They boast that Wangshing parts are used in half of all vehicles manufactured in the U.S., and the firm has operations across 26 states. Overall, the firm reports $25 billion in annual revenue globally. Now, Prometheum have started to respond to these allegations laid out by Tommy Tuberville. In a statement, the company said it, quote, did not misrepresent its relationship with Wang Xing and said the company's work would, quote, not be derailed by partisan and specious allegations. They added that, quote, during testimony, Aaron Kaplan, co-CEO, and co-founder of Prometheum,

never stated that the joint development of its blockchain trading system with Wang Xing ended in December 2019. We determined in early 2020 the co-development of technology was not viable, and in order to avoid corporate and litigation risk, sought to create value from our relationship. In its written testimony, Prometheum clearly states that joint development with Wang Xing and its affiliates formally ended in October 2021. Now, Kaplan has previously stated that Wang Xing holds a 20% stake in Prometheum, but has no access to the firm's data or technology. In their response statement, Prometheum claimed that the discussion of Wang Xing

or Hashi being a co-founder, partners, or otherwise, is dated and incorrect. Quote, as of June 25th, 2023, Hashkey is only a shareholder as it no longer has the right to appoint a director to the Prometheum board, and Dr. Schao stepped down from the Prometheum board of directors. Now, the response to all of this was just sort of head-shaking disbelief and belief all at once. Creative Drouy, a U.X designer at Salana Mobile wrote, the supposedly compliant crypto company the government rolled out couldn't make it one congressional testimony without lying under oath. That, or they've already committed securities fraud. Way to go, SEC. This continues to be just the

absolute weirdest story in crypto in 2023, maybe this entire bear cycle. So obviously, in spite of myself, I'm going to be keeping an eye on it. Now, the second story is equally weird if in different ways, and that has to do with Arkham Intelligence. One thing that is universally true on Crypto Twitter is that one never wants to find themselves or their company the main character, and yesterday, Arkham was definitely the main character. Basically, what happened is that on Monday, Arkham Intelligence announced their intelligence exchange. Over the past few years, years, the firm has been building out an on-chain analytics product and has now decided to offer a marketplace for on-chain information. Users of the exchange will be able to post bounties seeking,

quote, information on the owner of any blockchain wallet address to be serviced by the growing contingent of on-chain sleuths. These on-chain bounty hunters will be able to post personal ownership information anonymously using a smart contract. Arcombe explained the rationale for the service as an effort to, quote, de-anonymize the blockchain. They wrote in a tweet, quote, we believe that de-anonymization is destiny in crypto markets and that the intelligence technology built by Arkham will serve as a foundation for the self-regulation of the crypto economy. So, just so you're keeping track, we have a platform whose entire purpose, to be clear, is to dox people. The argument is that it'll be on-chain sleuths doxing the bad guys,

but of course, one doesn't have to think as adversarially as most Bitcoiners to understand how that might go very, very wrong. Now, on top of that, of course, there's a token. The token will be used as the native currency to settle bounties on the platform. Its token will be sold via Binance Launchpad with 5% of tokens available for initial sale, 20% of tokens given to core contributors, 17.5% going to investors, and 17.2% placed in a foundation treasury. Now, the weird thing about this is that this is a U.S.-based company doing a token sale with Binance Launchpad. As Nick Carter put it, Dallas-based company doing a token sale to global retail investors on Binance Launchpad wouldn't want to be on the board here.

Now, just to add to the 2017 vibes, we got this unbelievably cringy video where the founder was described as, I'm not joking, a crypto god, while spending more than $2,500 on sunglasses. I don't know who that's meant to appeal to, but I was pretty sure that all of those folks had left, I guess not. Anyway, as the day progressed, some of the people looking into Arkham found out that the company had already been doxing users. With the token sale pending, their customers were signing up in droves in posting referral links on Twitter in an attempt to claim an AirDrop. The only problem, those referral links contained each user's email address encoded in Bay 64,

a format that can be decoded using easily available tools. Cryptotrater Matsumoto said that they had alerted Arkham to this data leak on user emails back in January, which they responded they were aware of, but apparently did nothing to fix. This time the CEO of Arkham, Miguel Morel, did take a moment to post a response. He basically said that the Base 64 version of the platform was created to track user referrals by email in order to reward the users, not as a way to collect emails. However, he said, we should have changed this system after our user base increased exponentially. Going forward, all referral links will contain an encrypted version of the referrer's email so that it cannot be

reverse engineered. This change is already live. We aren't perfect, but we always strive to do the best thing for our users, and we will continue to do so. Our industry has been plagued with bad actors who survived by hiding in the shadows. Cryptointelligence brings them into the light, and that's what our platform and our research have always done. Now, there were some folks on crypto-twitter who tried to give these guys a fair shake. Bankless co-host Ryan Schott-Adams said, a marketplace for doxing wallets, love or hate. Cons, good people will be doxed and attacked, medium-term all your activity will be known, medium-term decreases on-chain activity. Pros, docs scammers, democratizes tools government already has, and longer term accelerates

privacy. Others, and I would say, in fact, the vast majority of people, were more skeptical. Investor Adam Cochran wrote, How many centralized exchanges have you KIC'd with offshore? How many centralized exchanges, casinos, NFT projects, profile trackers, or crypto accounting software have you signed up to with an email address and then deposited from your primary wallet? Did you read their privacy policy? Arkham's not rewarding sleuths. To get a monopoly on wallet identities, it's going to become exit liquidity for every shi offshore entity. Hope you followed good Opsack advice, read your terms of service, paid your taxes, and have good wallet hygiene anon, because it's going to get dirty.

Alcoigne Psycho wrote, thoughts on Arkham. Novel idea, the project has high upside, but, one, I dislike their mission of de-anonymizing crypto. Two, I worry it may enable a docks slash harass to earn culture. Three, disappointed seeing other Anon support it. I shared my feedback with Arkham hope to see it change. But then, Psycho came back and said, Axe shocked.

In less than 24 hours, Arkham has become a honeypot for Anon Dox's. Take an L if you supported this. Maybe summing it up best of all was Salazar who wrote, Docs to earn, Arkham single-handedly creating a new narrative. It's tempting to look at this situation and say, hey, Arkham is contra the values of Bitcoin and the crypto industry, an industry which values people's privacy and anonymity. The flip side is that it's also a capitalist industry that doesn't have one set of values, but just mass market competition for whatever people want to do. Both can be true at the same time, and frankly, even if one recognizes that there isn't some

universal set of crypto values, you can still express your opinion in the market by not supporting it. Ultimately, it just seems weird to me. And as much as I haven't shared the general take, which so many people shared, that it's just a Fed project trying to get your anonymous information, it's hard not to see something strange in it. If nothing else, it's hard to see how they plan on getting away with doing a token listing on Binance as a U.S.-based company. But here we are. Maybe they know something about the upcoming court cases and upcoming legislation that we all don't. For now, though, I think I'm going to just squint with a side eye and hope for a different type of story tomorrow. Until then, be safe and take care of each other. Peace.