Unchained - These 2 Crypto Trading Platforms Agree With SEC Chair Gary Gensler - Ep. 499

Episode Date: May 30, 2023

“Lack of regulatory clarity” is the catchall complaint levied against U.S. regulators by most major players in the crypto industry. But the founders of Bosonic and Prometheum disagree. Both firms have spent years chasing the necessary regulatory approvals to compliantly trade digital assets, including those seen as securities. Last week, Prometheum secured a potentially landmark approval to operate as a special purpose broker-dealer for digital asset securities. Prometheum co-founder Aaron Kaplan and Rosario Ingargiola, founder of Bosonic, which earlier secured a similar approval, discuss why big players like Coinbase need to quit carping in the court of public opinion and do the hard work of getting approved. Listen to the episode on Apple Podcasts, Spotify, Overcast, Podcast Addict, Pocket Casts, Stitcher, Castbox, Google Podcasts, TuneIn, Amazon Music, or on your favorite podcast platform. Show highlights: what Bosonic and Prometheum Capital do  how Aaron and Rosario started working in crypto what it means to be a special purpose broker-dealer what the three-step letter from the SEC is and why it's relevant for scaling a digital asset business how exchanges work in traditional finance and how crypto differs why Aaron believes there’s a “pathway forward for crypto in the U.S.” whether the argument that there’s a lack of regulatory clarity is convenient for crypto incumbents  why Aaron agrees with SEC Chair Gary Gensler on his stance that everything except BTC is a security how a token registration would work and what the nuances would be why Coinbase’s approval to be a publicly traded company does not mean that the SEC is in line with the business whether ETH is a security, with Aaron arguing it is and Rosario saying it’s a commodity what the different requirements are for national securities exchanges and alternative trading systems what Aaron and Rosario would tell existing crypto companies as it relates to compliance whether regulation kills innovation Thank you to our sponsors! Crypto.com Guests: Aaron Kaplan, co-CEO and co-founder of Prometheum Rosario Ingargiola, Founder and CEO of Bosonic Previous coverage of Unchained on crypto regulation:  Ex-CFTC Commissioner Berkovitz Says ‘DeFi Should Be Regulated’ – But How? ‘Is ETH a Security?’ Why Gary Gensler Couldn’t Give Congress a Straight Answer Coinbase's Legal Action Against the SEC: How It Will Likely Unfold Rep. Emmer on Why He Believes Gary Gensler Is a ‘Bad-Faith Regulator’ Is the Government Trying to Kill Off Crypto in the US? Coinbase’s Top Lawyer Calls SEC Wells Notice a ‘Massive Overreach’ Links CoinDesk:  SEC Proposal Could Bar Investment Advisers From Keeping Assets at Crypto Firms U.S. SEC Moves Toward DeFi Oversight as It Reopens Proposed Regulations Prepared Remarks of Gary Gensler On Crypto Markets Penn Law Capital Markets Association Annual Conference SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities Unchained:  SEC Chair Gary Gensler Avoids Question: ‘Is Ethereum a Security?’ Coinbase Seeks to Compel SEC Response to Rulemaking Petition SEC Asks Court to Deny Coinbase Demand for Crypto Rules Financial Institutions Hub: SEC Proposal Targets Crypto Exchanges, Trading Platforms, and Brokers Emmer and Soto Introduce Bipartisan Bill to Provide Regulatory Clarity for Digital Assets Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto eight years ago, and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the May 30th, 2023 episode of Unchained. Buy, trade, and spend crypto on the Crypto.com app. New users can enjoy zero credit card fees on crypto purchases in the first day. seven days. Download the crypto.com app and get $25 with the code Laura. Link in the description. We're here with Aaron Kaplan, co-CEO and co-founder Proetheum, and Rosario and Rosario and Gargola, founder and CEO of POSonic, to discuss the recent developments in FINRA approved broker

dealers in the crypto space. Welcome, Aaron and Rosario. Hey, Laura, nice. Thanks for having us. Thank you for having me, Laura. So as far as I understand, this is an area I'm not super familiar with, so you're going to have to help me out, both of you have been approved by FINRA to operate as broker-dealers for digital asset securities. And there might be some technical differences between your offerings, which we can dive into later. But why don't we have each of you begin by describing what it is that your company does? And we'll start with you, Rosario. What does Bosonic do? Yeah, well, Bosonic, as the main company, independent of the broker-dealer, ATS subsidiary, is basically in the business

of eliminating counterparty credit and settlement risk. So we've built a, what is effectively, a multi-custodial blockchain network that allows clients that are holding assets at custodians to be able to transact risklessly with an atomic swap at the custodial level. And we're currently live and in production doing that with digital assets that are not securities. And we expect to be doing it shortly underneath our new broker-dealer, ATS, with digital assets that are securities. And Aaron, what about Prometheum? Prometheum as a parent is building the technology that is used by its subsidiaries, Prometheum ATS and Prometheum Capital. Prometheum ATS was one of the first, if not the first ATS approved to publicly trade digital asset securities, and Prometheum Capital was just recently approved as the first special purpose broker dealer.

The idea is to create a thriving public market, which requires both having a trading and custodial infrastructure. And the idea is that the assets that are traded on the ATS will clear and settle at the custodial. at the special purpose broker dealer. Okay, great. Yeah, we'll dive into more details on all of that. But I also wanted to ask you about your backgrounds. So Rosario, how did you even come to work in the crypto space? I've actually been in the crypto space since about mid-2015.

So my background has basically been building institutional electronic trading platform companies as a founder for pretty much my whole career. So I had two companies prior to Basonic, the first one that I started with the computer science professor at University of California, where we, took a number of years of research we did applying machine learning and AI to algorithmic trading and basically spun all that out of the university and built a large-scale multi-asset, Algo trading platform for that we licensed to guys like B&Y Mellon and Millennium Partners and folks like that.

And then the last company was in the FX space, which is very close to sort of the crypto space in a lot of different ways. We built the whole front to back stack that guys like Cantor Fitzgerald and EDF man and folks like that used to run their electronic FX trading businesses. And the genesis of Basonic was basically coming into the space and realizing that it looks very much like the FX space in terms of being in big OTC fragmented market and wanting to basically do the same thing, aggregate all the global liquidity, produce an institutional offering, and then basically figured out you couldn't do it because there was no way to clear and settle the transactions across all of the exchanges, market makers, and counterparties. And so that was the genesis of Basonic. it was really born out of sort of necessity to solve that problem. And Aaron, what about you?

I initially got into the space in 2013, and it was always our belief at our law, my law firm at the time, the law firm I was working at that the federal securities laws were the best way to regulate digital assets or at the time, Bitcoin. We initially wrote a no action letter to the SEC in April 2014, asking them to not take action against us, should we trade Bitcoin through an ATS in a brokerage account? And at the time we got bedbugged, but I continued to operate in the space and myself and our CTO were involved in one of the first legal token frameworks coming out of an academic conference out of Harvard and MIT in 2015. And then when the Dow report came out in July 2017, it was the confirmation of our belief, the belief that the feral securities laws applied and that intermediaries in the space had to be regulated under the peril securities laws. So shortly thereafter, we started Promethe with the intention of creating that compliant ecosystem for, trading and custody of digital assets under the securities laws. Oh, wow. You started that back in 2017? Yeah, I believe September 2017. The Dow report comes out in July 2017, and it's the first time

that the SEC basically says that digital assets were at the time crypto or the general category implicated the federal securities laws and those operating in the space, meeting the financial intermediaries, would likely fall under the securities laws. So cutting through the lines, they were basically saying the federal securities laws applied. And so that's that's the first time that the industry gets the indication of that fact. And anyone who argues contrary to that fact has to start back since then and then follow the SEC's actions, the enforcement actions, the releases to see that there's been a clear linear path of regulation that's been in course or, you know, being applied since that time forward. Yeah. And I guess like the other thing,

though, that I thought was it seems like it's taken almost six years to get this approval then. Is that the conclusion or no? So we were initially approved as an ATS for digital assets in 2021. And then we just recently were approved, Bermitian Capital was recently approved as a special purpose broker dealer, which is super important because it's the first federally licensed custodian to custody digital assets under the securities laws. And the reason that's relevant is because there's a proposed change to the custody rule. And with that proposed change, crypto assets held by investment advisors, basically any institution that's held in the holding their client's assets have to custody their crypto at a qualified custodian.

Now, what's a qualified custodian? Well, the list is enumerated. It's a bank, a broker-dealer, meaning a, and in this case, a special purpose broker-dealer because that's the only broker-dealer that could custody digital assets under the Farrell securities laws. And beyond the other two categories, ones there's a futures category and then there's a foreign entity category. But those are the two main categories.

And the reason that's also relevant is because what does that mean for the state license entities. I believe that the federal licensure regime is replacing the state regime. And if you've listened to Chairman Sue, the chief of the OCC, he said that he wouldn't trust crypto companies until they're federally regulated. Well, I would argue that we are federally regulated, so we are worthy of trust. Okay. So yeah, this is getting into the weeds a bit faster, but let's just discuss this because I did have questions about this. So what you're referring to is that there are state chartered qualified custodians in the crypto space, such as like, I think, BetGo and Coin desk, and I forget some of the other companies, but you're saying that you believe

that even though they technically are qualified custodians, that because of this update to this RAA rule for how assets for RAs can be custody, crypto assets for RAs can be custodied, that essentially those state chartered qualified custodians will not. be able to do that. Is that what you're saying? That's the gist of it, but I would actually argue that the fact that their qualified custodian isn't established in the first place. Essentially, they are custodian licensed under state regimes. I went to the New York Department of Financial Services or any other state. But if you follow the comments coming from the SEC, there's a question of whether they meet the standards of a qualified custodian. And from a compliance and regulatory standpoint,

if you're an institution who's handling clients funds, you want to eliminate any sort of risk attend into the compliance or regulatory side. And the best way to do that is to transition that business to a qualified custodian license under the federal securities laws. And wait, and just so I understand, you are saying what simply, it's the fact that they receive their qualified custodian status by a particular state that would not qualify them, because I talked to some lawyers, and they mentioned what they called fund, the notion that the state chartered qualified custodians one not qualified. They called that FUD. And so it sort of seems like maybe some lawyers who've looked into it feel like there's this rumor flying around, but it's probably not based in.

I think there's been some guidance. I mean, I know our IRA lawyers for, I don't have it off the reference off the top of my head, but I know they've been able to get some official guidance where they've established that state chartered trust companies can be a good control location and therefore qualify as a qualified custodian. But I agree with Aaron. I mean, the direction of travel is towards federally regulated organizations. And so, you know, a nationally chartered bank, you know, would also fit into that category as well as the special purpose broker dealer that I think the Prometheum guys have gotten. Okay.

Well, so we went way into the weeds like early on and I want to like be sure to give enough background for everybody. But, you know, I feel like this episode is super interesting because we keep hearing this a mantra from the SEC come in and register, and then from the crypto side, we've heard, you know, there's no path for this. And so here you guys, I feel like represent almost some kind of new wave of how these things might be done. So let's just make sure we explain everything to the listeners. So FINRA approved both of your platforms. Why don't you unpack what it is that your platforms got approved for. Sure. So Prometheum has two entities. We've been approved as an ATS, which was in

2021, I believe. And that stands for, yeah, alternative training system. Alternative training system. Essentially, it's the forum where crypto trading activity is going to migrate under the securities laws. But if you think about it, if you have a trading venue, what you also need is a custodial venue because you need to be able to have retail and institutional custody and be able to clear and settle those transactions that occur on the ATS. So Prometheum was just recently this past week announced that it was approved as a special purpose broker dealer, which is a major step forward for the industry because it's the first institution licensed under the Farrell Securities Laws that can custody digital asset securities, which is a major step forward and will actually allow those ATSs to be further

empowered because then they can in theory really allow for trading to develop on those markets. And I think, you know, from our perspective, we, you know, we were approved as a, as a regular broker dealer with an alternative trading system license as well for both equities and debt securities, both non-digital securities as well as digital securities, which are defined as securities that are managed on a blockchain, whether that's a private permission or a public ledger system. And I think we also actually got an ECN permission for listed equities. And what does that mean?

ECN is electronic communications network. So that's basically a step below sort of a national stock exchange and allow to trade listed equities as opposed to registered but unlisted equities or private placements and basically the OTC market, which is generally what you're dealing with with digital asset securities. And I think there's differences, some pretty interesting differences that we probably should talk about around those ATS licenses and even around the special purpose broker dealer. and the ATS because I think there's some interesting, kind of odd rulemaking by the SEC around being able to do the custody, but then not being able to do clearing and settlement. And so how do you bridge the gap between the ATS and the special purpose broker dealer that's doing custody?

The way our system is set up and the way we're approved is under a three-step letter, we're not allowed to custody digital asset securities. So all of our clients hold Fiat currencies and digital asset securities in regular qualified custodians, whether those are banks or trust companies or something like we could in fact partner with Prometheum and actually use them as a custodian, which is a super interesting possibility for a lot of different reasons. And I think the big distinguishing thing around the ATS is there's two methods of doing the clearing and settlement and they refer to them as SEC three-step letter and SEC four-step letter. And the four-step letter is,

essentially just bilateral credit after the match happens on the ATS. Sorry, not bilateral credit, bilateral settlement, which implies bilateral credit actually also, after the match happens on the ATS. So in other words, if you and I trade on the ATS and we have a trade match, you and I have to set, why are you dollars and have you send me securities in some fashion? And the three-step letter is much more relevant for scaling a business and digital asset securities because it basically involves custodian-driven settlement. So the people that match on the trade tell the custodian to settle the trade. And so they have much lower counterparty

credit and settlement risk. And so part of why I think we got approved quickly is because our whole system is designed around sort of custodian-driven settlement. And it kind of just mapped really nicely under the three-step letter. So we had a really clear path. to basically comply with all of those rules. Okay, so because a big part of the audience here is, you know, not from traditional finance, many of them are kind of tech or crypto people. I thought it might be helpful if we, first of all, just look at how exchanges work in traditional finance,

or really just how the system overall works in traditional finance. We can contrast that with how crypto exchanges have worked so far. So please feel free to correct me if any of this is inaccurate. In a traditional securities market, the exchange is not consumer facing. It facilitates trading for its members, and the members are all broker dealers, and the broker dealers are the ones who interface with the customers. So the exchange then is limited to disseminating prices, monitoring trading activity, running the matching engine, matching orders, et cetera.

And as we've been mentioning, they do not take custody of the assets. They themselves do not do the actual trading. So then the broker-dealer members of that exchange can hold the customer funds and they can accept the orders from their customers who can be both institutional and retail for the trades. They can even provide credit to customers to support trading activities. And then there's another entity, which is the clearinghouse that keeps track of who owns the shares. It updates the accounts of the trading parties. So for example, in Tradfai, that would be something like the National Securities Clearing Corporation or NSCC. Then another institution involved is the DTCC, the depository trust and clearing corporation, that performs the settlement, which is when the actual exchange of money happens for the securities.

So obviously, in crypto, this is at least so far super different. The crypto exchange tends to do pretty much all those functions. They will match the orders. They custody the assets. They clear. They settle the trade. They're also consumer facing. And then if we get into defy, it's like really different.

We've got, you know, these decentralized actors. They come together. They use this protocol. It's basically like a type of software that's decentralized. And through that software, they can perform all these functions. Let's now talk about how, you know, let's walk through one transaction using your platforms, which now appear to be sort of yet another way that all this would happen. And either of you can start.

Yeah. And I guess just, you know, just for the listeners, sometimes people always, wonder what what's the difference between clearing and settlement clearing is basically figuring out who owes who what and then settlement is the actual change of ownership on the ultimate book of record and so that's that's basically uh you know those those two things and everything you just described in terms of how it works and tradfai is exactly correct that's how that's basically how it all works and and as you pointed out in in crypto um and i think this is a really really an important thing and i and i think it it also speaks to kind of maybe why what some of the motivations are and i and i hope we

get to this later in the conversation around the reality that we both got approved means there is a path to do this. And I think there's things to talk about like, what does that mean for things that might be illegally issued securities? And then there's other incentives that people have. Like the way the exchanges are currently operating in crypto is they're relying on money transmitter licenses, right? So that means that they can hold client assets effectively on their balance sheet. And that's why we see a lot of the problems that we have, because when you sign that user agreement and you send your money to the exchange, if they're operating under that money transmitter license sort of regime, those assets are allowed to be on their balance sheet. So in theory,

they could borrow those assets through another sub if they wanted to, probably legally, if the agreement sort of discloses that. And that's, therein lies the problem, right? That's why you have FTX thinking they can loan assets to Alameda and all of these sorts of things going on. And I think, FTX was not a US-based exchange, but anyway. Yeah, but well, I mean, FtX, US, I mean, obviously is operating in the same way. I think that's, you know, that's a, obviously there's going to be a change where exchanges are going to be non-custodial. And if you think back to the FX markets, crypto exchanges, the way they operate, where they basically hold client assets, they do things like take the other side of the trade.

They're doing all sorts of things that retail brokers used to do in the way. FX space 15 years ago, that all got regulated out of existence. All of the practices were regulated out of existence. So the way it works in our model with a three-step letter is basically clients hold their assets in their own accounts at their own custodian. So fiat currencies, digital asset securities. That means the custodians have the role of safeguarding those assets. our technology basically allows the custodian to create subledgers that are blockchain based, where those assets are reflected on those subledgers. And essentially things like real-time pre-trade risk are reading client balances that are

cryptographically provably on those custodial blockchain ledgers. And effectively, you then can put an order into the matching engine. When you get a match, it's executed effectively as an atomic. swap or a change of ownership at the custodial level. And Aaron, how about you? How does it work on Prometheum? So I think let's look it at a very high level. First, what we're seeing is a shift in the crypto financial services ecosystem from

one that's sort of regulated under state licensure. Rosario mentioned the money transmitter license and basically state custodial licenses. And we're seeing to a shift to entities regulated under on the federal level, security's laws. And that's part of this maturation of the industry towards actually providing the investor protections, the segregation of customer funds and assets from that of the institution, the fair and orderly markets, and basically everything that's required for the industry to move forward and to actually be taken as seriously as any other asset class. Now, on the Prometheum level, the way it works is that when everything's live, the asset will list on the ATS,

excuse me, not list. And the difference is, as you mentioned before, with an exchange, this is an alternative trading system. There's distinctions. With an exchange, the exchange has to work directly with the issuer to determine what assets they list. With an ATS, an alternative trading systems, an ATS makes it an internal determination based on its customers' needs, whether it wants to support trading in that asset. So that's a distinction there. But if there's a determination, basically, that the asset is a security, meaning the digital asset is a security, then it will be supported on Prometheum ATS. And that asset will actually also be custodied at Prometheum capital.

And when that happens and when we in the near future, we'll also be able to clear and settle those transactions that occur at the ATS. So in theory, you have the full life cycle of a trade. You have a trade that occurs on the ATS. It's cleared and settled at the custodian. And those assets are custodied at that custodian. So basically, you provide the entire life cycle. there of a trade. And by doing it under the federal securities laws as opposed to the way it's done

in the entire cryptovirce now, you're basically integrating the investor protections that are required to move the industry forward. Now, you mentioned before when we were talking about how it works in, you know, in the virtual currency universe of virtual currency exchanges. Now, one of the things that we all hear about and we know exist in some capacity is those exchanges in theory trading against their customers. These are one of those things that just cannot. fly once you integrate the benefits of the fairer securities laws. And one of these things that are really needed for the industry to move forward and be taken as seriously as they think they deserve. Yeah, I don't know if, I'm not sure if there's a particular, or is there a particular case of

that that you know of? I would say that, you know, there's been reports that at some point 60 to 80 percent of trading is wash trades. It's basically botched trading against each other. And that leads to a manipulated market because it does, you don't have a fair and overly market then. Go ahead. 100%. And we've even seen, I saw an article, like I tried to find it, but I couldn't find it again, where Gensler actually mentioned or was quoted saying something like that I think even, and this, maybe I shouldn't mention names, but one of the major exchanges in the U.S. has market making subsidiaries that are pricing into the venue, right? Those things are okay if you, if those are adequately disclosed to the clients, right? But there are other practices in that originated in FX. that they refer to as A booking and B booking. And that's basically where you analyze all your client trading flow by client, literally by client. And when you have the overwhelming majority of clients that are trading actively lose money, right? So taking the other side of the trade of the guys that always lose money and essentially being the one that makes the P&L on their loss,

those are practices that were, you know, performed inside of retail FX brokers that that basically were also sort of regulated out of existence in this country, you know, along with a lot of the high leverage and everything else that people were doing. And a couple of questions. So when you talked about how there's a stat that 60% of trading on crypto exchanges is wash trading, does that include, is that solely limited to U.S. exchanges? Are you talking about globally? Because I remember a long time ago, Bitwise came out with a report.

and it implied especially particularly on, you know, I think it was like Chinese exchanges at that time. I don't know if now what it would be. But at that time, you know, I think a lot of that was stemming from there. I believe it might have been globally, but I'd have to check. But it's known in the industry that there are these manipulative trading practices that occur. Again, when you don't have proper oversight and proper regulation and proper enforcement by an agency that's capable, you know, when the cats away, the mice will play. And then the other thing I wanted to ask was so when I described the Tradfai way of processing a transaction, there were kind of like four main entities involved, or maybe it was five, actually. And then for, you know, obviously in the example of crypto exchanges, it's all just one. So it sounds like to me for both of your new systems, it will end up being two. Is that correct? Yeah, you basically have the custodial entity and then you have the ATS entity, which is,

effectively where the matching engine technology is and the matching happens. And it's kind of, in our models a little bit different because what we're really, really what is happening is you have sort of peer-to-peer trading that self clears and settles where we're just programmatically having the clients notify the custodian to process the net settlement movements. But we can make those settlements atomic so that nobody has a go-first situation, right? Like the way everything works off exchange today in crypto is through bilateral credit and bilateral settlement. So after the trade at the end of the day, you figure out what you owe all your counterparties.

You wire money to those counterparties. They send you what they owe you in terms of digital assets or digital asset securities. And that obviously is also one of the, if you look at the direction of travel from a regulatory perspective, they're trying to clean all that stuff up, right? that that that that's really not fit for purpose for institutional trading or fiduciaries right if you're a fiduciary meaning you're running you're not running you it's not your own money it's client money and you're a regulated entity should you really be wiring money to some other entity and hoping that they send you an asset in return right those sorts of things are just not fit for purpose and in a proper market okay and then Aaron I wanted to ask you about the special purpose broker dealer

regime because I think, you know, that's the sort of new thing that we're talking about here. So can you describe, first of all, what it is, what it does? Also, what are like the limits on its activities? So the special purpose broker dealer is basically the federal custodian licensing under the securities laws to custody digital asset securities. Now, what initially, it was released in December 2020, I believe was called the Christmas release at the time. And then it was adopted into law and to the federal.

register in April 2021. So it provided a clear framework by which to actually custody digital assets under the securities laws. Now previously, people said, well, you know, no one had been approved for that. So even if there is a framework, maybe there's no path forward. But now that Prometheum capital's been approved as a special purpose broker dealer, that argument is moot. You can't make that argument anymore. And it's monumental in the sense that it shows that there's a pathway forward for crypto in the United States. And also, you know, as all the, in my opinion, all the sort of trading and custodial activity migrates to venues that are licensed under the securities laws, you need to have the firm, I think the most important part of that is the custodian side, because there will

be ATSs, but until you have custodians, those ATSs aren't empowered. And as Chairman Gensler has said, the overwhelmed majority of digital assets are securities. So let's analyze what that means. that means that they have to be traded, custodied, handled, etc., under the securities laws. Now, what does that mean for the existing crypto financial service providers? One, it means that they don't have the proper licenses. And two, it means that their tech stack is arguably obsolete because it's not meant to handle digital assets the way that securities are supposed to be

handled, processed, traded, custody, et cetera. So it requires a big rebuild there, in my opinion, as well. So why do we see such intransigence from the virtual currency exchanges, the established players? Because it's a significant task to update your technology, to go get the proper licenses. It's a big process. And it would take them a significant amount of time. So instead, what we see is that they move to fight in the court of public opinion, which I would argue is always a sign, is never a sign of something good, I guess is the best way to say.

And what's the real way you want to say it? What's the real way I want to say? I don't know if that means you think you're winning the battle. It might be more of a, you know, a Hail Mary type effort as opposed to a calculated logical, rational step. But I do have a question, which is, you know, when we originally laid out kind of like all the number of entities involved in the different processes, you know, I think a lot of people in the crypto community would say that forcing there to be more intermediaries where they're, where it's, you know, where it's. like not necessary, doesn't really make sense. And I was curious if you, you know, had a response to that. So like the, the interesting concept of decentralization, particularly on the exchange side. I mean, we see a lot of the activity occur now in centralized entities, entities that have intertwined business lines where they're providing essentially trading, custody, banking,

lending, staking, et cetera, et cetera, et cetera, services. And I would argue that's a centralized point of failure. Plus, it's not actually integrating the investor protections required under the federal securities laws. So you're much more exposed as a customer there. And furthermore, when that institution goes belly up, because it's not under the federal securities laws, in a lot of those cases, you become a general creditor. And that is not good because an investor should gain or lose money or make a profit or a loss based on their own investment decisions, not based on the mismanagement of the entity where they choose to trade or custody their assets. And then so basically under your setup, if either one or both of your entities were to go bankrupt,

then you're saying that those clients would not be general unsecured creditors? What would they be? There's a segregation of customer funds and assets from that of the institutions under 15C33, the customer protection rule. And if you're in compliance with the customer protection rule, their assets would be protected. They would still be their own. Okay. So what you're saying is like in the case of FTX where it even said in the terms of service, you retain title over your assets, you're saying, somehow that's like, granted, as I said earlier, they were not a U.S.-based entity, but you're saying that's not sufficient that there's some extra step that happens when you have the two entities split

that. If there's no oversight and there's no enforcement and there's no reporting, basically you're your own SRO, you're going to make sure you when you enforce your own rules. And as we know, they had such high standards when it came to risk management and other sort of internal, you know, compliance considerations. You need to have an entity that, oversees the participants in order to make sure that they stay caution. Yeah, and I think a lot to what Aaron was saying earlier, I mean, part of why they don't want to do it is because they're monetizing the current structure.

And, you know, I mean, what Pasonic does with its, on its enterprise software side of its business, I can make any exchange non-custodial in a day. Like we, that's what we do. We invented off-exchange settlement. We use, you know, separate, regulated, segregated custodians to hold client assets. that's exchange can still do what it does and match trades. So there's another incentive that's driving those decisions. And I think, you know, part of it might be the fact that they're like, you know,

it seems like the path of least resistance to fight because not only do they need the licensing, which we've already proven anybody can get, we got them, but they also have the issue of what do you do with where most of the revenues coming from on any of these exchanges. It's coming from things that are illegally issued securities. from the SEC's perspective. So, you know, and that, and that, you know, and how do you fix that problem, right? And that's, and that, and that doesn't bode well if that's where 60% of your revenues coming

from like a coin base. In that respect, I think the issuance problem is its own thing, you know, the registration component, but it's more of a question of the trading and custodial venues being licensed under the laws. And essentially, you know, the, anyone who is arguing that there is a lack of regular clarity is basically best served by the argument that there is a lack of regulatory clarity. Think about it. Like, you want, you want Congress to create new legislation.

And then what they could do? They're going to create a new federal agency. So basically we're half a decade to a decade out. And in the meantime, the investors who use these platforms occasionally have to deal with black swan events. The trading's not fair and orderly. And, you know, they're basically not protected by the investor protections. They're the ones who lose in that case.

The best way forward for their actual customers. is the application of the federal securities laws. And it's what Chairman Gensler said when he testified. He said his clients are the U.S. investors. That's who he's looking to protect. And it makes a lot of sense. All right. Last quick question before we go to the ad break.

I just was curious, you know, as you mentioned, the special purpose broker dealers were first proposed in 2021. So why has it taken it about two years for one to be approved? So it was adopted in April 2021 into law, right? And it takes a long time because you have to build the systems to be compliant with the regulations to be compliant with the regular. you're trailblazing. Essentially, it hasn't been done before. You have to not just build the systems

that have to be compliant. You also have to have the operational and compliance procedures and basically all the internal mechanisms to make sure that when you are approved, you will be able to be compliant with everything that's required under the federal securities laws in that release. And there is a lot there. I'm not going to say it's not an easy process. It just requires focused effort and an actual belief that digital assets are securities. Yeah. So in a way, I feel like it's almost like you guys saying we're iTunes and Spotify and we're coming in now after like Napster and Limewire have, you know, been the dominant programs for a while. Is that kind of a good summary? I have not heard such a good analysis in a long time. I think that's pretty good.

Okay, okay. So we're going to talk in a moment about exactly which assets are going to be trading on your venues in a moment. But first a quick word from the sponsors who make this show possible. Join over 80 million people using Crypto.com, one of the easiest places to buy, trade, and spend over 250 cryptocurrencies. With the Crypto.com Visa card, you can spend your crypto anywhere and get rewarded at every step. Up to 5% cash back instantly, plus 100% rebates for your Netflix and Spotify subscriptions, and zero annual fees. New users enjoy zero credit card fees on crypto purchases in their first seven days. Download the crypto.com app and get $25 with the code Laura. Link in the description.

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information fill the void, and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise. CBC News. Back to my conversation with Aaron and Rosario. So, as we've kept saying throughout the episode, you guys are going to be trading

digital asset securities. So how are you guys defining that term? I was curious because I'm sure you know there's this strict definition that everyone agrees on, which is clearly recognized securities that just come in a blockchain wrapper. But I wondered if you were also including this definition that's more contested, which is the one you've referenced that Chair Gensler of the SEC has used, which is all crypto assets except Bitcoin are securities. So how are you defining it? What are you going to list? Prometheum on the ATS and the custodian is able to support digital asset securities. That is not traditional equities.

In theory, it is an equity issued on a blockchain. But our goal is to be able to support the existing investment contract universe of crypto. And Chairman Gensler has said that the overwhelming majority of digital assets, arguably everything except for Bitcoin, is a security. And Prometheum has that same belief. So you think you can list everything but Bitcoin, essentially, all crypto assets but Bitcoin. Again, it's a determination made by the compliance teams and the operational teams at both the ATS and the special purpose broker dealer levels based on a, you know, a amount of different factors,

you know, the, and if a determination is made that an investment contract exists and therefore it's a security, we would then intend to be able to support trading in that asset. Okay. So it sounds like the Gensler, guideline is sort of one that you will be using, essentially? Yes. Okay. And Rosario? Yeah, I think for us, I mean, it's it's a little more complex than that. So first of all, we have, we have slight differences between our approvals. We can't custody. They have a special purpose broker dealer, which can custody. They can't do non-block chain-based securities. We can do non-block chain based securities and blockchain-based securities, both public ledger and private ledger. So we have potentially a bigger

universe of things that we can list and we're doing transactions or partnerships now with other companies that want to issue, well, we just support standard sort of private equity, kind of like a forge global or what you see on like an angels list where you have buyers and sellers of equity in Web3 companies. That's one of the partnerships that we have that we're working on. We have another one that's just standard commercial paper issuance by very large corporate treasuries, but they want to issue on a private permission ledger so we can support the creation of those assets on our private permission custodial ledger side of things and then list those assets and run a secondary market in those assets to trade them. Obviously, anything that has been properly registered

that we think is clean and we can list and trade and would love to do that. I think it's really important, though, that we don't ignore the fact that most of what all of the crypto other than Bitcoin that the SEC believes are securities, they also believe are illegally issued securities. And so in order to be compliant, it does not mean, I want to be really clear that it does not mean just because we have these approvals that we can take anything that's out there indiscriminately and just list it and trade it and support trading in it. That doesn't really work that way. So we've been focusing a lot of our effort around sort of how do you help the token issuers to remediate that situation so that they can become compliant, at least in the United States, with the security, if they are securities, with the securities that they've issued by bringing them under a proper registration.

Can I ask a question? Is that through rescission? Or is that through a secondary registration such that eventually those are liquid tokens then get liquidity into the public market that develops with the registrations? And we define rescission. It's what you pull the assets out of circulation. Rescission is you offer the investor the right to get out of that investment because it was an illegal type offering. It was an unregistered security. And if the investor doesn't take that right, then essentially they basically made the agreement and there's no longer a legal claim against you such in that event. Now, the other possibility I think that Rosario might be implicated is a subsequent

registration of a new grouping of that same token, which would then in theory be able to establish. a public market, a trading market for that asset. And those other tokens that previously exist, as long as they've been held for a year and a day could then be traded under Rule 144 and that liquidity could be introduced into the public market. Yeah, I mean, let me describe sort of, I agree with everything that you're saying. But I think there's a, I think there is kind of a path forward, right? So here's the way we've been thinking about it. If you are a token issuer, right? And this is, you know, I think this is very important because to understand the landscape as well, because you have venture capital firms, major venture capital firms that have financed companies that have issued these tokens, that they themselves hold the tokens.

Some of them have onsold the tokens to the general public, and they might all be illegally issued security. So I think there's very big incentives to figure out how to remediate this. And Aaron raises a great point. One of the things that will not work is the typical way that these things get remediated is through rescission, because that means everybody gives the money. basically you have to offer to give everybody's money back. Nobody can do that because all of these projects have been spending the money. So what we're trying to work on is a no action letter around a remediation plan where you get your amnesty. In other words, if you become compliant in the United States, you don't have, you don't get prosecuted effectively.

You don't have to do full rescission. But the way we're thinking about it is that you could easily have a smart contract that takes in on an opt-in basis. the old token and essentially burns it and mince it again with some metadata tagging that links it to a proper registration statement. And you get some really unique benefits of that because that means that you could even have a Dex or a DeFi protocol that could be U.S. capital markets compliant processing only those tokens. And you can have a programmatic way of swapping them out if the token issuer is willing

to do an actual registration, right? But Rosario, in that event, won't those tokens? become a liquid unless they're registered in the subsequent registration? Well, no, I think they have to, I think to, whatever they're issuing, any new token that they're issuing, they would have to issue under the new registration. I think that's the point. And then it's a burn one for one. You're saying that. Burn one for one. And essentially, and I think, and I think this is another thing, Laura, just to put, I just want to put some scope around this. People think this is this big, huge threat thing to do a registration statement. It is literally like a

50 to $100,000 legal exercise. And, and I just want to put some scope around this. People think this is this is this big, And if you look at some of the provisions under the Jobs Act, if you have less than a billion dollars of revenue, you don't even have to do most of the reporting that everybody's so scared of. So I think there's a real opportunity to let U.S. companies become compliant in a way where the token is not, stays fungible, right? So you only have to, you only become compliant if you want to, if you're a holder in the United States. It doesn't affect how it's custodied, traded on exchanges. It doesn't affect anybody outside the country. you can do this one-for-one swap out and have a compliant version of the token in the United States. Okay, I have so many questions.

So first of all, because these token projects, they're sort of global in nature. How does that play in? Because we're just really talking about this U.S. regime. So what they need to do the rescission for, you know, like let's say they have like a hundred million token supply or something like that. Do they have to get everybody to do that in the U.S.? Because like what I was imagining was, do you remember when there was some kind of issue with the chargers for iPhones? and then they had to reissue a bunch of them with these like green stickers on the back to be like, this is the new one that's okay and is not, you know, it doesn't have this faulty design

or whatever. I'm just imagining like the tokens being like that. Like you pull back the charges without the green stickers and then you issue the ones with the green stickers. But I'm just confused how this works for like a global situation. Everybody's doing programmatic compliance if they're doing anything with security tokens today, right? if they're doing it compliantly. So being able to look at metadata on a token is not a big deal if you are a custodian or somebody else who's a regulated entity who's handling those things. And so in other words, if you're an institution with all of those tokens at Coinbase custody,

if people adopted some sort of a framework like this, why wouldn't Coinbase custody just do the swap out for you? And therefore, you're now holding the tokens that are under the registration statement. But they would have to get all exchanges all across the world to do that. and all the liquidity pools. I think it's the only possible way it could work in my mind is it's strictly an opt-in-only thing for people that are affected by U.S. law and want to be compliant with U.S. law. There's also a couple things. One, in regards to the point you made about the Reggae Plus, I would say that you probably need to be Tier 2,

which means you need to be PCA will be audited in order to really allow for trading it. Explain that for people. When Rosaria was mentioning before about the regular. and the issuance of how you're going to choose to properly register or have an exemption to issue that security, right? There's a full registration with an S-1 or you can do probably a good alternative is a reg A-plus, which has lower sort of reporting requirements in theory. Now, the issue is is when you go to do the reg A-plus, if you really want to do one that allows you to have the most trading in the future, you want to do a tier two reg A-A-plus, which has the PCA-O-B auditing requirement. Now, why am I, which is a higher accounting standard. It's basically, don't forget, when you do a registration statement, what you're doing is you're making

disclosures about your businesses, listing all risk factors, they're going over your auditing and your financials. They're not actually approving your business like some people argue. They're not approving your business lines. You know, they're basically just saying that this document is disclosing all the material facts and that the auditing is good and that the risk factors are there. So that's just to contest that argument being made in general. But the reason I ask that because when you come to the.

issue. Sometimes it's a little bit more complicated. I would note that Prometheum in a different lifetime was one of the first companies to file a reg A Plus for a token. So we have a lot of experience with this. I would say we're likely the first company. That did not work. And that was very positive in its own weird way. But essentially, it's, I understand what you're saying there. I think there's an alternative. And then when it comes to the, when you asked a question before, Laura, about the United States for tokens in the United States versus outside the United States, The SEC primarily cares about U.S. investors. So in theory, as long as you're doing a proper registration and offering to the U.S. investors,

what goes on outside the United States, as long as it complies with AMLKYC, and you do an exempt offering outside the United States, it doesn't touch the United States, there's not necessarily as many regulatory implications for those holders outside the United States. So that's why I think in theory there might be a pathway forward there. But we've been focusing a lot on this register. I think it's sort of, it's definitely important, but it misses the forest to the trees in some sense because what is, I think, will happen before these registration issues are solved is a migration of the existing trading activity, existing custody activity to entities that are licensed under the

securities laws. Now, registration will be solved or the lack of registration or what happens with certain tokens will play out over time. But before that occurs, I think you'll see a lot of the activity that's currently on virtual currency exchanges migrate to these federally licensed entities for trading and custody of digital assets. Because again, if all assets are securities, they need to be treated and traded and handled as such under the securities laws. Yeah, I agree with that. But I mean, are you going to, are you, I mean, are you guys going to list and trade something on the ATS or custody it if it's, if it's, if it's deemed to be an illegally issued security? Or you're going to go through, you're going to go through a process

to figure out which ones you're comfortable. with that you think are? There's internal compliance considerations there and determinations about what you're comfortable with. I agree with you that that's probably the area where it's the least clear, but that will play out over time. I thought it was very telling, you know, when Chairman Gensler testified in the House Financial Service Committee, and one of the first committee members, I believe it was the

chairperson said, is Ethereum a Security? And then people got upset because Chairman Gensler didn't answer. But the reality is, if he answers one way or another, basically he either knocks off half the market cap of Ethan a day or he shoots it up the other way. I thought it was actually probably responsible not to be all of a sudden make some sort of incredibly influential statement in a public hearing that will potentially affect a lot of the holders of Ethereum. I think it was actually admirable that he didn't do it. So let's now just talk about specific assets because, you know, I notice both of you have screenshots of the app on your home pages. So like, for instance, Aaron, the screenshot and the Prometheum homepage shows, you know, the app, which shows FIL, which is Filecoin. And already we know

the SEC has given notice, it believes that's a security. So, okay, so you're trading digital asset security. So it fits in that bucket. But then there was also comp and flow and sell and GRT, which is the graph. And I didn't know, like, you know, does that hint that you guys are going to have those available? And if so, like, did you and the SEC already agree that those do fall in that bucket of digital asset securities or like how did, you know, or, yeah,

I'm just curious how this process works. I believe what you're referring to is only an example. At the time, we're not announcing the assets we're going to support. But again, it's an internal determination whether an asset is a digital asset security on the Prometheum ATS and the ProCAP levels from the compliance and operation side. And so basically, based on that determination, that will make, that determination will determine the assets we support. Well, I was going to say what I saw on your homepage, which is there was a longer list, actually, of tradable assets and a screenshot. And actually, it even had some BTC trading pairs.

but I didn't know really what that meant. Like, is that saying BTC is in addition to the securities or just tell me about your process for a listing? Yeah. So we're, so today what we do, well, that's not, it's not indicative. And that's the parent company homepage, right? So we're more of a infrastructure provider. We both operate infrastructure that people use today to trade fiat currencies against digital assets that we believe are commodities like Bitcoin and Ethereum.

There's only very, very small number of those. And then we also license it to other people that might trade other assets using our technology or use our technology for clearing and settlement and elimination of counterparty risk, trading other assets. And so it's not indicative. But I think we're of the opinion that we can only list and trade things that are basically approved securities that are not illegally issued. It would be wonderful if we could just suddenly take everything that's out there in the market, Gensler thinks is a security and trade it, that would actually be awesome from a business perspective. But I don't think we're, I don't think we're able to do that. One other thing that I

think is, you know, a lot of people wonder, and if you look at some of the banking regs, you know, banks are, you know, not even able to do certain things with digital asset securities that are issued on an L1 on a public blockchain. And so when we work with a lot of the banks that are, that are in our cross-custodian that settlement working group, and these are major banks like State Street and guys like that, they're very focused on tokenization of existing non-natively digital securities and not necessarily doing that on in layer one, but doing it on a private permission system. And those assets can also be listed and traded on an ATS through our approvals with the broker

dealer ATS license. And so I think that's where there will be a very big push towards that over the next, over the coming years. I think most of the assets that will be in play will ultimately be that, unless we get more clarity from the SEC that we can just take all of the other existing tokens that are out there that are securities and list and trade those safely. I think we would want more guidance from the SEC on that. I totally agree with that as a concept, but if you think about it, the Chairman McGinsler said recently that virtual currency exchanges are trading securities and time is running out for them to register under the securities laws. So what we've seen in

enforcement, as we've seen, first it goes after lending, then staking, then stable coins, then custody, and then finally virtual currency exchanges. That goes from the most risky to the least risky parts of the crypto ecosystem. So where does that activity go? I don't think that the goal is to harm investors such that they won't have a venue by which they can actually trade those assets. If that occurs, the price bottom, in theory, would drop out of a lot of those assets. And that's not what's in the best interest of those investors. So I agree with you that over time we will get more clarity. I also think that there has to be a place for that activity to occur in order for the industry to move forward. When you say time is running out for these exchanges to register,

is there some limitation there, some kind of deadline? No, that's what you have against the headset. But there's no like regulation saying if you've launched in this way and, you know, then you have like X number of years to register? No, it's basically you are trading securities. You don't have the proper licenses. You're not handling them properly. You are running out of time. And you are running out of time to basically get even the opportunity to register under the securities laws. Before an enforcement action. In theory, and that's the implication. And if you don't, I believe those entities will perish.

So I'm so confused. Like, why did Coinbase get approved to, you know, become a publicly traded company then? So that's what I was referencing before. When you do a registration statement, right, the SEC does not approve your business. The SEC approved a lot of public companies that were marijuana companies. Those are federally illegal. So the argument doesn't make sense because, what they're doing is they go through your disclosures.

They go through your accounting, your auditing. They go through your risk factors. And make sure you have all the material facts that you're disclosing anything that an investor might think relevant when making an investment decision. That's the definition of a material fact. Or you're not leaving out any facts that are considered relevant. And that's what they approve. They approve the offering document. They don't actually approve your business lines.

It's basically taking a concept, which is well known in the legal universe, and distorting it in the realm of public affairs to basically serve your own interest, but it's just a fallacy. So basically, any company that's doing something that's illegal can become a publicly listed company, is that what you're saying? Again, I don't know if you would say, in theory, I would hope not, but at least when it came to the marijuana companies, it's case in point. What they were doing was federally illegal.

On the state level, they might have been allowed to do it, but they were approved as well. This is just sort of blowing my mind at this moment. No, Rosario, you can confirm what I'm saying. You're 100% right. I mean, you can, you can easily, you can easily see that parallel there with those types of companies. I mean, and you said something really interesting earlier, Aaron, you made a reference to Rule 144.

Is there a, and you're, and I think the listeners should know that Aaron is a lawyer and I am not. I'm curious about what you were referencing there. like, is there something under the law there with 144 where if you, where these, these things that were illegally issued can, can ultimately get cleaned up by just through, through a matter of time and how they're transacted?

The reference I was making there was if you were to do a subsequent registration of a certain number of tokens. Now, what would that happen with those tokens that weren't registered in that offering? In theory, they would not be able to trade into the public market. Right. Because they're not registered.

So that's when you could, in theory, use 144. Got it, got it, got it, okay. And wait, so define 144 for the audience? It's a rule by which a illiquid security is able to what's called remove the restrictive legend, meaning they move from being illiquid to being a liquid asset. So meaning they could be traded into public markets. They could actually be traded versus an illiquid instrument cannot be traded on publicly and basically you'd have to do a private securities transaction with another arguably

accredited investor in order to be able to have that transaction. Where once an instrument's liquid, you can trade it publicly on, you know, any sort of public market. Okay. And that's all qualified institutional buyers, right, for 144? Isn't that all quibs, basically? I don't, I think it's more expensive than that. Interesting.

Okay. We'll try to find that out and maybe insert something. if we can before this goes out. So you guys, you know, we've been discussing like which assets you guys are going to be listing. So I need to ask you, are you going to be listing, Eith? I believe that since the ICO in 2015, Ethereum has been an investment contract and there is no legal precedent where a security, meaning an investment contract that therefore is a security, morphs into a non-security. There's been sort of ideas of sufficiently, decentralized, posited out there, but they're not really based in legal precedent. So once a security, always a security under the legal precedents that exist. And as such, while we're not announcing anything at this current time, as Chairman Gensler has noted, and I'll sound like a broken record, the overwhelmed majority of digital assets,

basically everything besides for Bitcoin is a investment contract and therefore security. Yeah. And our answer is, we're currently supporting Ethereum. but not on the broker-dealer side of things, because as you know, the broker-dealer ATS can't deal with digital assets that are not securities. I think we've taken the position, at least historically, that thought ETH was a commodity. And I think the CFTC sort of indicates that they agree with that. But it raises a really interesting point that you brought up, Aaron, and that is that one of the things that has been put forth by some of the thought leaders on the legal side of things, you know,

I think you know some of these folks like Joshua Clayman and others. Like there's a concept that might make sense actually for something to be able to morph from what started out as a security for capital raising purposes and ultimately, you know, becomes sufficiently decentralized and becomes really a utility token and not a security and is used in various other ways other than for purposes of raising capital. And I think I think that's a super interesting concept. There's no legal precedent for that. whatsoever. So I think it's a long way out to kind of get any kind of guidance or if that could

even ever be a thing. But it is a very interesting concept that I've heard some folks talk about. To paraphrase the previous chairman of the SEC chairman, Chairman Clayton, people don't speculate on laundromat tokens. And that was the whole argument then. People speculate on investments. I don't, I don't know. That one seems out there to me. All right. Well, I will say that another wrench that might get thrown into this is that Representative Emmer and Representative DeSoto introduced a bill that would enable an asset that was sold as part of an investment contract to later become deemed a commodity. So who knows if that will get passed, but that's also potentially in the works. So one other thing that I was wondering is like, so BOSonic, I guess, has like kind of a bigger range

of things that it can list. But for the part that, you know, concerns digital assets, securities. Did you guys have to get a list of those approved by the SEC? Aaron, it seems like you are just sort of saying this is like an internal decision with your compliance team. So I was curious, like, you know, who's deciding and like, how are you creating that decision process? Like, is it in conjunction with the SEC or how does that whole thing work? It's not something that you is part of your new member application where you actually talk specifically about the assets you're going to list. You're really just, you're basically just saying that, you know, you're going to be dealing with securities. In our case,

digital asset securities or non-digital asset securities. And it's all about compliance and sort of the mechanisms in place for how you do matching and essentially protect the customers. That's really what the whole thing is all about. So I think the decision about what you list ultimately comes down to the firm and their legal counsel and sort of their internal processes, as Aaron pointed out. You know, I think I'll be very interested to keep talking with you, and see what you guys do because I think maybe we can take a page from that book because it would certainly be nice to be able to start transacting in some of these other aspects. Again, we've always worked very closely with regulators and compliance has been our first consideration.

We were incubated out of federal securities law firm with molecular expertise in brokerage and financial infrastructure related activities. We're obviously going to make sure to be as in tune with how compliance operates as possible and not take any sort of, you know, grand risks or any sort of major statements because I think that in general, what's happening here is sort of a crawlwalk front approach. You will see this migration occur. It'll just be with the system growing over time. Now, when you look at like the Chicago Board of Options Exchange, when it launched, it launched with two contracts that traded for four hours a day, I believe. And then it builds out from there. And I believe it was only long, right?

So, like, you know, or maybe whatever it is. But essentially, like, what you'll see is that once this activity starts to migrate to these securities-compliant ecosystems, first you'll see custody and trading evolve. Then you'll also see, you know, potentially margin and additional sort of developments as this sort of ecosystem develops out. And overall, what you'll see beyond that is the development of a national market system for digital assets. Just not the exact same way that it occurs with equities, but it will occur to eventually. look something similar to that. Now, there won't be a DTC or NSCC, but like there will be a national market system that will develop because as more people are approved and more people are compliant

under the Fairl Securities laws, I think the pie will continue to grow and it'll have a network effect as opposed to being a famine mentality. And I was also curious because, as you guys know, for securities, there are disclosure requirements. So for the securities that you guys do list, will you or the SEC require those same kind of disclosures from those issuers, you know, for instance, similar to the ones that we see for securities listed on national securities exchanges. You know, we've seen the SEC talk about that. But, you know, I didn't know how this was going to be implemented for your new entities.

Well, in respect to a national securities exchange versus an ATS, alternative trading system, the national securities exchange has to work with the issue. That's the distinction here. And basically they can't list an asset that they haven't worked with the issuer in that sense. On an alternative trading system, it's basically a determination based on your customer needs, and it's basically matching buyers and sellers in that sense. So there's a distinction there that I think gives you a little bit more flexibility as to what assets you support.

And I think that sort of that'll be a positive thing going forward for the industry there. And so you won't require those kinds of disclosures because they're not. actually required. We will make sure that anything we do is compliant under the feral securities laws. Yeah, I agree with that. And I think to say it another way, what Aaron's saying is it's between the issuers and the buyers. And so, you know, whatever the issuers are putting forth, I mean, obviously, we want to make sure that they're not fraudulent, you know, companies and things like that. There's all sorts of, you know, bars to, and things to, boxes to check around being compliant, but it ultimately is just a, as he said, a different animal, right? It's between

the issuers and the buyers. We don't actually even have to list the, or provide all of those, that information directly, like they can get that information directly from the issuers or from the issuers website, in fact. Okay. So this question is around the fact that actually, Tara Gensler has kind of implied in the past that he would actually prefer a national securities exchange model for trading of crypto asset securities, not ATSs. And obviously, that's not what's actually happening because you guys have these ATSs. So I was curious, from your interactions with the SEC, does it seem to you that the agency is now leaning more toward using this model of ATSs for crypto exchanges rather than national securities exchanges? I just want to clarify, to my

understanding, the reference to national securities exchanges is when there was discussions between the SEC and the largest virtual currency exchanges that basically said they would have to register as a national securities exchange based on the services they were providing. I don't necessarily think that they were promoting a national security exchange versus an ATS. I think that they were saying entity we're speaking to, entity XYZ, right? You need to, would have to register as a national securities exchange if you want to be compliant under the securities laws based on the activities and, you know, the business lines that you provide. Yeah, I think I think that's right. And I think their intention. I mean, and there's just lots of practical considerations. I mean, if you're a

national securities exchange, you have to publish all of your trades into the SIP. I mean, those are things that don't even run 24-7. I mean, there's years and years of infrastructure changes that would have to happen to have a national securities exchange trading digital assets 24-7. And it would involve collaboration and cooperation with the owners of that, which are the other national stock exchanges, et cetera, right? So I think, I think, I think, I think this is the model forward. And Aaron's, I think that is right about the reference to that. It's just, it's just the nature of what they're doing would put them into that category. You know, we have a subset of permissions that are a step below a national stock exchange, but perfectly

suitable for running a business like what a major centralized exchange is running for trading digital assets securities. And then also, like, you have to follow, like if you look at the history of Wall Street, follow the NASDAQ model. I believe NASDAQ starts out as a ATS and then eventually becomes a national securities exchange. It's sort of like a maturation process. It would be such a, you'd be going from like, you know, from kindergarten to like a PhD if all of a sudden you went from virtual currency exchange to ATS and it was skipped ATS. It went directly to national securities exchange. They couldn't even regulate their own activities. How are they supposed to regulate other people? So. Okay. So then one other thing about this distinction between national

securities exchanges and alternate or trading systems. So I believe if you are a national securities exchange, you're exempt from this next thing I'm going to discuss. But as an alternative trading system, you would then also be subject to blue sky laws, which are state level regulations for securities offerings. And those have similar requirements around registration and disclosing the securities issue or details of their offering. Sometimes they even have to get approval from the state regulators. So does this mean that you're also at the moment dealing with state regulators for your listings? So the blue sky laws you're referring to are on the registration side, essentially to be able to offer that security in that state for an initial issuance. On the broker-dealer side, I believe,

and Rosari, you could tell me from the loft that there is a annual sort of, I guess, fee to do conduct business in that state. And basically, there's a process by which that broker-dealer is licensed, but approved to conduct business in that state. That's a little bit different, just a small distinction there. Yeah, and I think those are, pretty simple check the box exercises. I actually don't remember all the all the details on it. And I'm not sure. I don't think you're I don't think you're going to get regulate you the whole point of being a national stock exchange or even you know, a broker dealer is you're regulated at the federal level and you don't have to, you know, deal with the state level. I think the issuers have

to make certain filings around the blue sky laws in the states that they're selling in is I think what it's related to. Okay. Okay. But it doesn't the the ATS does not get involved. or they're not included in that. There's a state-by-state fee you have to pay to be doing a business in those states, but it's not like a state-by-state registration of your ATS in that state. Okay. So obviously there were so many details to get into, but now I want to step back and do bigger picture, which, you know, we've kind of been discussing sort of throughout,

but, you know, we've discussed this kind of, he said, she said that we've been hearing from regulators and the industry, the regulators saying come in and register, and the industry saying there's no real path for this. So I was curious, like, now that you guys have your different approval from, I mean, they're slightly different approvals from Finra. I was curious, like, what advice would you have for a Coinbase or a Cracken or like any of these other big crypto exchanges? If you were them, what would you do? It's interesting because in the industry for a long time, people say, well, we go speak to the SEC and we get a Wells notice, but they're not mentioning how they were conducting all this business

activity that was improperly licensed and not compliant with the feral securities laws. They are conflating two concepts. One is how do we move forward, right? How are we going to become compliant? Not how we clean up the non-compliant activities that previously occurs. There's really no way, like maybe in theory there's ways through no action letters and something and grandfathering, but you can't exercise those skeletons out of your closet. And I think that's one of the biggest issues when it comes to a lot of the legacy crypto-financial

service providers and the virtual currency exchanges is that there are a lot of skeletons there. And how then do you transition to an ecosystem where you're under strict enforcement and regulatory guidelines and reporting guidelines and it's a significant task? And I think that's why we see such intransigence from the virtual currency exchanges in being aloof or obtuse to the writing on the wall that digital assets are securities. You know, they argue for a lack, that there's a lack of regulatory clarity because they're literally best served by the lack of regulatory clarity. Yeah, my advice would be, let's not forget that the U.S. is the biggest capital market in the world. This is the most important market in the world. I don't think you want to go offshore.

I think that has all sorts of implications. It's the wrong approach. I think thumbing your nose at regulators is not the way to do this. I mean, this is, this is, you know, it's not easy, but it's not hard. We did it, you know, and went through the process and got the right approvals to be able to do this business in the right way. And I think that, you know, people just need to be way more cooperative with regulators and really sort of just be committed to becoming compliant. I mean, I think if we were at a point where the big centralized exchanges instead of fighting, we're saying, great, we've bought a broker-dealer ATS license. We're ready to go. what do we do with all these illegally issued securities we've been trading? We'd get the answer to that question and we'd get some clarity around that, right?

But nobody's doing it. Nobody's going through the process. And it's disappointing. I think it hurts the whole crypto industry. I would highly encourage everybody to just go through the process of getting compliant and let's do this the right way. This is the biggest market in the world. And also the idea that regulation kills innovation is just, it's, It's nonsense. Let's think about it. Where is innovation in the space? Is innovation on the financial

service provider side? Like, that's really what's really taking the best advantages of distributed architectures using them in interesting projects? No, it's actually on the project side as the token issuers. So regulating financial service providers does not kill innovation. Allowed an unbridled, quote unquote, innovation from their standpoint led to FTX, led to the events of 2022 that basically that harmed retail investors that really if you think about it like they democratized a scam they didn't democratize finance they basically allowed the internet to be taken advantage under the guise of innovation to have the general public participate and also in third world countries not just in america but a lot of just normal mom and pops participate in their nefarious ventures and as a result

there has been a pendulum swing which makes a lot of sense so instead of basically spending your time and your effort, fighting against your regulator, arguing in the court of public opinion, focus on innovating your systems such that are compliant under the federal securities laws. And again, Rosario is totally right. When you generate the overall majority of your revenues from the United States, I don't think you're going to leave the United States. And how are you going to be competitive internationally with finance who has such a big market share that is just a different beast internationally? And, you know, that's a different question when it comes to compliance, but that's a totally different conversation. So I don't understand how, wait, one more point there. And also what we've

seen is when all these entities start to go internationally, they, a lot of times they catch black eyes and they pull out. You know, if we've seen it happen in India, we've seen it happen in Japan, we've seen it happen in different countries now. And it's much easier, in my opinion. It's a much more logical stance to figure out how to morph your business into one that's compliant under the securities laws in the United States and understand this new paradigm. So this was a pretty new topic for me. And since I'm not sure if I covered everything for my last question, I just want to ask you if there's anything I didn't ask you about that you think my audience should know on this topic. I think it's just a general observation. One of the things that's sort of really awkward

phenomenon is I think that the general public is going to be much more knowledgeable when it comes to securities regulation than at any other point in history. Like there's an article I read the other day on one of the websites. And it's like a two, three, thousand word article on what Wells notices mean. And it was a pretty good article. Like, you know, this will educate people and people will understand that like financial instruments are regulated, period. You need to include the investor protections required in order to make sure that the public can properly participate with those financial instruments and discussion. Yeah, I mean, and the only thing, I agree with that. And it's not that the general public wants to

know about what a Wells notice is, but I think, I think, um, you know, I just want to be very clear that we're, you know, I'm 100% bullish on the crypto space on, I think there is a place for commodity tokens. I think there is a place for utility tokens and things that might not be securities. But I just think that we've, you know, we've got to figure this out quickly or it's going to harm a lot of people. You know, people, people like Coinbase, the leaders in this space really need to sort of do the right thing, I think. And, you know, and I think that they want to do the right thing. Maybe they're just taking, taking the, you know, going a different, down the wrong path. You know, I think if nothing else, at least we've shown that you, you can go

get regulated to do something with digital assets and digital asset securities in the current regime. I mean, in the midst of literally what's going on with Wells notices and all of the sanctions and everything else that's going on, we, we were able to go and get these approvals. And ATSs are, those, those are, you know, SEC registered. I mean, this is, them literally looking at this application and saying, yeah, we're approving these guys to do trading in digital asset securities. So I think the argument that you can't do that is just not is just not valid. Let's find a way to get compliant and like, you know, get back to work. Which means overall that there is a path forward for crypto in the United States.

100%. Okay. You guys, this has been such a fascinating episode. Where can people learn more about each of you and your work? You can go to prometium.com. or checked in our LinkedIn or Twitter. Yep, same here, basonic.digital. And soon we'll launch a site for the brokerage side of the business. That's just the parent company with our technology. Perfect. Well, it's been a pleasure having you both on Unchained.

Thanks, Laura. Thank you for having us. Thanks, Erin. Thanks so much for joining us today to learn more about Aaron and Rosario and their new platforms. Check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Kevin Fuchs, Matt Pilchard, Zach Seward,

Wanda Ranovich, Sam Shrebram, Jenny Hogan, Jeff Benson, Leandro Camino, Pamma Jimdar, Shashonk, and Margaret Curia. Thanks for listening.