The Breakdown - The Prometheum WTF: Is This an SEC Grift Just to Mess Up Crypto Legislation?

Episode Date: June 17, 2023

This is truly one of the weirdest stories in crypto this year. Today NLW dives deep on Prometheum, a company that only showed up on most people's radar this week when their CEO inexplicably testified before Congress. Was it all a big SEC Grift? 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 Saturday, June 17th, and today we are talking about what is genuinely in a world, an industry full of absolutely bat-sh-should crazy stories. The most baddiest shittiest crazy story of the year. Before we get into that, if you're enjoying the breakdown, please. please subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, and I think you might after this one, come join us on the Breakers Discord. You can find a link in the notes or go to bit.ly slash breakdown pod.

All right, so on Thursday, June 15th, Jake Trevinsky of the Blockchain Association tweeted, today, blockchain association sent a Freedom of Information Act request to the SEC, seeking documents related to its dealings with Prometheum. This whole story, Prometheum's ATS, its CEO's testimony in Congress, makes no. sense. Something fishy is going on here. Maria Toshman-Koppel and I will get to the bottom of it. So today we are talking about how we went from an organization no one had heard of at the beginning of the week to the Blockchain Association filing an FOIA request by the end of it. Two weeks before the SEC began their latest barrage of lawsuits, some interesting news

circulated. A crypto firm had been granted registration. For months, Gary Gensler's talking points have been focused on how easy registration is. Just fill in a form on a website, he said, good to go. His claim, of course, was that crypto firms simply didn't want to do it. Now, Coinbase and other major firms in the industry had called this rhetoric preposterous, stating that they had been taking meetings and trying for years, but failed to get anywhere. It was therefore a bit of a surprise when reporting surface that FINRA, the industry-funded oversight arm of the SEC, had approved its first crypto broker dealer. That firm was Prometheum, which again, and I can't stress this enough, basically no one had ever heard of. The firm said that they had received approval as a special

purpose broker-dealer, as well as an alternative trading system, that's that ATS word you just heard, and would be able to offer crypto trading to accredited investors. A major part of the reporting around registration was that this proved Gensler's point, that there was a viable pathway towards coming into compliance with the regulator. Prometheum CEO Aaron Kaplan even echoed Gensler's commentary in interviews, stating that, quote, there is obviously a way forward for crypto in the United States. Those complaining about a lack of regulatory clarity were trying to put a square peg into a circle hole. It's the least insane thing about this, but getting that phrase wrong square peg in a round hole somehow just goes with all of the rest of this madness. Anyway, Kaplan was clearly pushing this

registration as at least a major promotional opportunity. He appeared on Laura Shin's Unchained podcast to continue preaching about how viable SEC compliance was. If he did it, so could everyone else. At the time, the story was noteworthy, but went a little under the radar. Industry professionals had never heard of this firm. It wasn't obvious they had a pathway to bringing useful product to market, but it was innocuous enough to move past. I can say that we here at the breakdown didn't even really consider running the story because there's just nothing there. Now, when it came to Aaron's appearance on Unchained, a few in the Crypto Legal Field noted that much of what he said sounded at best and incorrect and at worst misleading. James Sari from LightSpark said,

this week's episode of Unchained is a must for those interested in crypto markets and the SEC's approach to regulation. But best not to take everything said during the discussion as correct on the law. However, then Prometheum got a lot more airtime. On Tuesday of this week, the House Financial Services Committee held a second hearing on the McHenry-Thompson Crypto Market Structure Bill. The hearing featured a panel of industry heavyweights, including Circle CEO Jeremy Aller, and Amin Gunsir, the CEO of Abelabs. the company behind Avalanche. Alongside them, inexplicably, was Aaron Kaplan, the co-CEO of Prometheum, Inc. The block managing editor Tim Copeland writes, I did wonder why I tuned in to see some guy I'd never heard of representing the crypto industry. Charles Hoskinson of Cardano put it more bluntly, saying, who the hell are these Prometheum guys?

Now, Kaplan's testimony read like a ringing endorsement of SEC policy, again claiming that registration was a completely viable pathway for crypto firms. He fielded questions during the hearing, largely from Democrats, about the various dangers of industry practices like intermingling of funds. At times, he appeared to be reading off a script and veering far outside his presumed area of knowledge, touching on the dangers, for example, of allowing non-banks to issue stable coins. Now, we've seen Congress set up sympathetic witnesses in hearings to pitch softball questions to before.

That's nothing noteworthy in and of itself. But, as you'll see, it gets weirder. Now, Republican Mike Flood brought out the big guns. He dug into Kaplan's business model and got some straight answers on the record under oath. Flood opened by reading back to Kaplan an objection that his firm had written regarding SEC crypto broker-dealer rulemaking in 2020. Three years ago, Prometheum had said the unclear definition of a crypto asset security, quote, puts a burden on the industry to determine which digital assets are securities.

As a result, we believe that clarity is needed to understand the regulatory framework they must comply with. When asked what changed since that comment, Kaplan answered that SEC enforcement actions and statements had brought the required clarity. Flood also noted that Prometheum's website said that they offer, quote, many tokens that mostly trade on crypto exchanges, and decided to dig a little deeper on that topic. Specifically, he asked whether Prometheum with all of their beautiful licensure, the licenses remember that they're claiming, mean, that the crypto industry is just belly aching, and the SEC has given it everything it possibly needs to register and come in and move on

and be compliant. He asked whether they were able to offer Bitcoin and a theory. trading. Kaplan answered that they couldn't. Now, Flood, quite reasonably, if you ask me, suggested that Prometheum's lack of ability to offer the major crypto assets might be an illustration of why new legislation and new thinking were needed. Congressman John Rose made a few additional points. He noted that although Prometheum had found its way into the Democrat talking points, the firm's registration was more or less meaningless at the moment. The key point that Coinbase and others have been making is not that registration is impossible, but that is it's unworkable. Exchanges which are licensed to trade securities cannot also host trading of commodities

like Bitcoin and Ethereum, meaning that at the very least firms would have to choose between offering major crypto tokens and all coins. Furthermore, there is no license to offer unregistered securities to retail investors, and there are no crypto tokens of any significance that have successfully navigated the securities registration process. At the conclusion of the day's testimony, it was unclear whether Prometheum could offer any crypto assets for trade whatsoever. And since then, further digging makes it appear that the exchange has no customers, no market, and perhaps even no real product to speak of. Despite the brutal public taketown, despite Prometheum holding itself out as the poster boy

for well-regulated crypto, despite having no obvious markets to offer. Those things weren't even the strangest part of the hearing. Later that night on Tuesday, a photo was circulated showing Aaron Kaplan being handed notes in the chamber from someone in the front row. Investor Adam Cochran wrote, when it sounded like the Prometheum guys were giving canned responses during testimony, they were passing notes, which is totally fine and fair to do, unless the question at hand is, are you being fed answers as a plant?

Adam Carroll, the CEO at Dixani, wrote, I was sitting there in the hearing going, who TF is this guy, trying to research in real time and wanting nothing more than to get behind a mic and ask questions, sitting there the whole time passing notes back and forth like they're in high school. So what the hell was going on? Well, the bizarre testimony was looked at by the sluice on crypto Twitter, and the digging began. Now, even prior to the hearing, Rodrigo Sierra, Policy Council at Paradigm, had dug into the claims being put forward by Kaplan and Prometheum and called out some mistruths. He writes first,

what is Prometheum? They are a broker-dealer with no real operating history that recently obtained FINRA approval as an alternative trading system. Since their approval, they have described themselves as the only compliant alternative for crypto asset trading in an industry full of willful lawbreakers, e.g. the cringe interview on Unchained that is rife with misstatements of law. While the testimony spends a lot of effort distancing Prometheum from its Chinese investors, by the way, we'll come back to that in just a moment, editor's note, it fails to mention a critical fact. An ATS cannot facilitate trading for any unregistered securities not offered under a valid exemption, which is exactly what they allege tokens are. Therefore, Prometheum's ATS won't be able to

trade any tokens unless projects first register the tokens with SEC. And as we have pointed out, there are effectively no tokens registered with the SEC because the current regime is not a viable option. Prometheum's ATS is a bicycle with no wheels. We hope that the financial committee will see through Prometheus's mischaracterizations of the law and understand they do not represent a viable path for crypto compliance. But again, that was before the hearing. Where the story really took a turn is once Castle Islands Matt Walsh began looking into the background of Kaplan and Prometheum. He discovered that in 2021, Prometheum had filed roadmap documents indicating they were building a layer one blockchain with its own tokens. Notably, some of these tokens had been sold to a firm called

Shanghai-Wan-Syang blockchain. Now, importantly, earlier this month, the Wall Street Journal published an expose penned by Senator Tommy Tuberville, claiming that that company has close ties to the CCP. He offered a range of concerns about data privacy and security and argued that, quote, Prometheum's approval by the nation's security regulators is at best a failure of due diligence. The Chinese Communist Party is working overtime to infiltrate the American economy and exert control over our markets. We must take quick and decisive action to protect the investors and innovators

who are driving our economic growth. The SEC and FINRA need to wake up. But it goes on. Matt Walsh kept digging and found that Prometheum had raised over 48 million in venture funding despite so far having no product and appearing to lack a viable path to building one. These fundraisers were done via an investment bank

which is simply not normal for startups. But it goes on. Promethium has paid over 1.5 million in sale commissions to a New Jersey firm called Network One Financial Solutions, another Chinese-owned firm. This brokerage firm has quite the checkered history, chocking up 18 regulatory events, one civil lawsuit, and four arbitrations. Network One have been active now in the crypto industry for a long time. However, if you've heard of them before this week, it's definitely not for anything good. The broker-dealer underwrote the notorious publicly listed beverage company Long Island Ice Tea,

which pivoted to blockchain in December 2017. You might remember it because it rebranded itself, long blockchain corp and received a 500 stock price bump that same day. Alas, by April 2018, the firm's shares had been delisted from the NASDAQ. And in 2021, the SEC delisted the company's shares for failing to submit any financial report since 2018, noting that the firm had never made any steps into the blockchain industry. The regulator later charged three major investors in the firm for insider trading. Network 1 were also tangled up in the Longfin scandal, another company which was publicly listed in 2017 amid Bitcoin hype. The company and its CEO were charged with fraud in 2019

for misrepresenting themselves as a U.S.-based firm and issuing free stock to insiders ahead of the listing. Walsh's investigation into Prometheum also turned up that Aaron and Benjamin Kaplan, the co-CEOs of the firm, obtained their legal training at a law school that has since been unaccredited. And if all that wasn't enough, Prometheum's team is absolutely stacked with former regulators from the SEC and FINRA,

as well as industry professionals, including the former head of cryptocurrencies at the CBOE. As Matt summed up, what is going on here? Bizarre that this fringe player with no business model is being held up as an example of compliance by the SEC when the actual businesses in the United States can't get a fair shot. Is it an SEC sci-op to have Dems opposed McHenry-Thompson market structure bill? The conclusion that people came too soon was a pretty clear one. Ryan Sean Adams from Bankless wrote,

I think Gensler and Warren's anti-crypto army may have actually rubber-stamped a shitty ATS-quaz scam Alt 1 in order to hold up to Congress as an example of a compliant crypto exchange, but the work quality here is 2017-era-I-Co scam laughable. This has to be rock bottom, right? Gemini co-CO-C-EO-Core-Wankevost wrote LMAO, the SEC greenlit a vaporware BDATS to pretend there's a happy path to becoming a compliant crypto exchange. You just can't make this stuff up.

And like clockwork, Gensler went on the record, with the Wall Street Journal saying some have actually registered, and there's a path forward here. That some he is referring to is Prometheum, a crypto company that has failed to launch a product in six years, and that literally no one has ever heard of. Adam Cochran writes, um, WTF, so how did some fringe lawyers with funding from arm's length CCP entities, a presale token, and Warren-style talking points, get regulatory approval from Gensler at all when no one else can? What an utter plant! If I were the SEC and going to have a plants at a congressional hearing, I would not have chosen the one with the shady past who looks like

the very concept of crime has morphed into human form. Framework Ventures founder Van Spencer wrote, The Prometheum fraud is one of the wildest things I've ever seen, multiple layers of crime, like a crime onion. Precogat Cosmic Infinitum writes, Prometheum looks like a tailored shell of a business that was intended to be a marionette for the SEC. They seem to be a moot company that doesn't represent the rest of crypto. All right, so at this point, let's try to parse through the possibilities of what the hell is going on here. The explanation that seems to be what most of crypto is coming to, is that this is an SEC or FINRA or Gensler or Elizabeth Warren Sciop to present plausible talking points to sucker Democrats into voting against McHenry Thompson. Basically that this

was a politically motivated approval. They needed someone to show that you could quote-unquote comment and register, and this was the organization they chose. Now, within this explanation, there's a deliberate version and the suckers version, but both are pretty alarming. The possibilities are one, that the SEC deliberately set up a straw witness in a hearing, or two, that the SEC got conned into championing a fraudulent firm because they tell them what they want to hear. I don't know, guys, neither of those sounds too good to me. Now, an even more concerning possibility is that there is, in fact, some Chinese influence or financial warfare here. I don't think we need to get super deep into that possibility. I'm sure that plenty of others will go exploring those threads.

But again, the point I'm trying to make is that not really any version of this ends up looking good for pretty much anyone involved. So the big questions then are, of course, what the hell is going on, who knew what, and how complicit are the Democrats. And that, of course, gets us back to the blockchain association. Finding the entire story too bizarre to ignore, that's when they filed the freedom of information request to the SEC to find out what's going on. As Marissa Toshman-C sums up, in the midst of aggressive SEC enforcement, Prometheum gets approval for first-of-its-kind special-purpose broker-dealer for digital asset securities, suspicious. The CEO, somehow gets a seat in front of Congress and argues that Prometheum represents the compliant

path for digital assets? And they paid $1.5 million in sales commissions to a Chinese-affiliated entity with quite the regulatory track record? Hmm. So what comes next, aside from podcasts like this one that are just gobs back till next Tuesday? Well, on Thursday, the House Financial Services Committee announced two SEC oversight hearings this coming Thursday. One will deal with the SEC in general, with the second specifically dealing with the division of trading and markets. It's not clear yet that this has anything to do with Prometheum and no witnesses have been announced thus far. But given Kaplan's testimony this week and the questions asked by congressman, it's hard to imagine that these hearings are not at least somehow related. So guys, that is the TLDR from here.

Like I said, one of the wildest stories that we've seen this year. And one that still has many, many layers of this crime onion, as Vance put it to unfold. I will be here gleefully keeping track of what's going on, and hopefully we get more information soon. For now, I hope you are enjoying a wonderful, beautiful early summer weekend. Until next time, be safe and take care of each other. Peace.