Deep digging into Prometheum, the “compliance model” in the eyes of SEC: Is it legit or a scam?

An analysis of Prometheum's compliance model and its legitimacy according to SEC regulations.

Edited by: Felix, BlockingNews

If you have never heard of the cryptocurrency startup Prometheum before this week, you are not alone. However, it seems that overnight, the company has become a shining example in the eyes of the US SEC. According to US SEC Chairman Gary Gensler, in an industry rife with “bad actors,” Prometheum is a glowing exception.

Prometheum co-founder and co-CEO Aaron Kaplan testified before the House Financial Services Committee earlier this week, saying that the SEC has made clear a compliance path, and that those advocating for new laws are simply unwilling to comply with the existing applicable securities laws.

Kaplan’s comments have drawn criticism from many in the cryptocurrency community, who believe that the relatively unknown company Prometheum has received regulatory “political favoritism” by following the SEC’s position and Gensler’s statement. But Kaplan said in a statement that Prometheum’s newfound regulatory status is the result of its hard work. Kaplan said, “For years, Prometheum has been committed to building a compliant, regulated trading platform for digital asset securities, providing investors with the protections required under federal securities laws. This is an important step forward for the crypto industry as it demonstrates that an approved regulatory path exists.”

What is Prometheum? Who is behind it? Cryptocurrency enthusiasts have dug deep into the startup company to try to figure out how it became the first Gensler-approved company in the cryptocurrency field.

Prometheum’s ATS company (security token exchange) was established in 2018 and approved by the US SEC in July 2021. Prometheum’s jurisdiction to operate its SBPD (broker-dealer) business is limited. According to the US Financial Industry Regulatory Authority (FINRA), the broker-dealer business has been licensed in 15 different states, including New York. In addition, although Prometheum’s office is located on Wall Street, and its ATS and SBPD companies are registered in New York, the company is not currently listed on NYDFS’s homepage as a registered virtual currency business.

About the team, venture capital firm CEHV partner Adam Cochran revealed on Twitter that many of Prometheum’s team members come from former regulatory agencies. Such as Rosemarie Fanelli, who previously worked at the New York Stock Exchange and the US Financial Industry Regulatory Authority:

John Tornatore of the Chicago Options Exchange Global Market:

Joseph Zangri, Chief Compliance Officer of the U.S. SEC:

Additionally, since Prometheum submitted a Reg A+ filing to issue tokens in 2017, no product has been launched. At the same time, Prometheum has cleared social media before 2019, and there have been no reports or news about it from 2019 to the end of 2022.

If you search year by year through Google, you will notice that there were many negative voices in 2017 and 2018. Until the end of 2020 and the beginning of 2021, Prometheum claimed to be regulated by the SEC and raised $15 million. This means that Prometheum only got the approval of Jay Clayton (former SEC chairman) instead of the current government. It relies solely on the committee statement allowing brokers to hold custodial digital assets.

But even so far, Prometheum cannot settle or clear trades, so even though Prometheum is registered, it cannot operate. The following picture is from an article about Prometheum by Bloomberg, which states that Prometheum has no product, cannot settle or clear, and hopes to list assets in the future.

Then Prometheum was silent for a few more years. Until the end of 21 and the beginning of 22, Prometheum hired former FINRA and SEC employees (still without a clear product). After that, they suddenly got the regulatory approval they wanted.

Cochran also stated that Prometheum claimed to be an exchange incubated by Chinese capital (Wanxiang Blockchain, Hashkey), and raised $48 million without any product, and paid $1.5 million in fees to brokers Network 1 Financial (note: Lei Tuo Financial Group, a full-licensed service stock brokerage securities company registered with the SEC in the United States).

And Network 1 Financial has more than 20 regulatory or civil litigation records.

In 2022, Prometheum announced the launch of ATS and will support encrypted assets including Flow, Filecoin, The Graph, Compound, and Celo. Since Prometheum is a compliant trading platform, why does the SEC list tokens in lawsuits against Coinbase and Binance that overlap in both exchanges?

In addition, Matt Walsh, General Partner of Castle Island Ventures, believes that the US SEC is using Prometheum, an “edge participant without a business model,” to persuade Democrats to oppose the Republican-led digital asset market structure bill.

Congressman Mike Flade (R-NE) criticized that Prometheum currently does not allow customers to trade Bitcoin and Ethereum. Aaron Kaplan said that this is partly due to the company’s “steady development” strategy.

In response to various questions, Prometheum posted a tweet on June 15th as a partial response, stating: Prometheum’s position is clear, and following the current regulatory framework established by the US Federal Securities Act is the direction of development of US digital assets.