Crypto's regulatory potential with Aaron Kaplan (Prometheum)

The cryptocurrency landscape moves at both a fast clip and a snail’s pace. On the one hand, we see sudden swings in tokens’ value, unexpected rug pulls, and swift government intervention (sometimes). On the other hand, the crypto landscape experiences continued uncertainty in terms of regulation and enforcement: Does the state define cryptocurrencies as actual currencies—or are they securities, or property, or some mix?

An early settler in the crypto space, Aaron Kaplan, Founder and Co-CEO of Prometheum and a securities attorney by trade, has, since 2014, advocated for crypto to be regulated as securities. With that viewpoint in mind, Kaplan and his associates even submitted a letter in April 2014 to the SEC, arguing that the best place to trade virtual currencies is a brokerage account in an alternative trading system (ATS).

“The goals of the securities laws are investor protection, full and fair disclosure, and fair and orderly markets,” Kaplan told The Financial Revolutionist. “But at the time, the SEC—and, in general, the world—didn't really understand the implications… of virtual currency.”

In an interview with The FR, Kaplan describes the regulatory gaps Prometheum looks to bridge, the need for institutional as well as retail investors, and his vision for digital assets moving forward.

This interview has been edited for length and clarity.

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The Financial Revolutionist: What is Prometheum, and what need does it try to address?

Aaron Kaplan: Prometheum has built the public market infrastructure for its subsidiary, Prometheum ATS, which has obtained the regulatory licenses to allow for public trading of digital assets securities through an ATS. Promsetheum is also in the process of developing the infrastructure for its other subsidiary, Prometheum Capital, to obtain the securities license for a blockchain custodian, meaning a special purpose broker-dealer that will allow for Prometheum Capital to custody digital assets securities and settle the digital asset securities transactions that occur on our ATS subsidiary. So think about this as the equivalent of a clearing firm for traditional securities. The overall goal is to create an ecosystem to allow for compliant issuance, trading, clearing, settlement, and custody of a digital asset under the securities laws. 

We’re trying to create a bridge that allows Wall Street to connect into the digital asset universe compliantly. It's pretty difficult for what I would call a major financial institution or securities house to integrate with a crypto exchange. It’s just apples and oranges when it comes to regulation, and not just apples and oranges, but certain levels of AML/KYC and other potential issues that I don't think many financial institutions are super comfortable with. But if you are operating under the securities laws compliantly and under the same regulatory regimes, the integration becomes much more seamless. It's not apples and oranges—it's apples to apples, and it eliminates a lot of the compliance risk or the regulatory uncertainty that I think is the last bit of hesitation before you're seeing mass adoption by major institutions.

Back in 2014, coming out and saying, “No, we think securities laws apply here,” must have invited a lot of pushback from people in crypto.

The era of the cypherpunks, or the crypto anarchists, right? 

Sure, as well as those with a more libertarian understanding of what crypto is or promises.

There's a little bit of a pushback, but I don't think it's necessarily bad. I think it's part of the natural evolution of what the industry would go through, or any industry that becomes a major, prominent thing. You need those “true believers” at the beginning: They're the ones who are driving things along. But as things mature, government doesn't go away, regulation doesn't go away, and the larger you become, the larger of a target you are for regulation. And I think it's just a natural evolution of what's occurred since then. 

You can make an argument that Biden's executive order on crypto is the line of demarcation: when it became official that there's going to be some sort of federal component here. But the writing was on the wall before that. It's just the natural evolution of the industry as a whole, in my opinion.

Reading Biden's executive order, it seems like a law about making laws, rather than a granular framework for regulating crypto. As someone who's much more inside the industry, how did you interpret the executive order, and did anything within it change Prometheum’s strategy?

It was a positive step, I guess, is what I would say. I think that it's par for the course, and it's sort of the natural process going on there. And I think there will be more to follow. I personally don't believe that there needs to be comprehensive new federal legislation. The federal securities laws are the best frameworks here to regulate investment contracts, which is essentially the qualification by which most of these tokens fall under the securities laws.

Given that trend toward regulatory certainty as well as your comment on Prometheum being a bridge to Wall Street, it sounds like the more promising path forward for Prometheum is in the institutional space rather than the retail space.

Initially, Prometheum ATS will launch for institutions, but we built public market infrastructure that’s also meant to be retail. The goal is to build, really, a public market. Most digital asset security ATSes out there right now are private share markets. But Prometheum’s goal has always been for a public retail-based market that can also support more sophisticated API- and black box-based trading strategies. If you look at how the general markets operate, you need both sides to that. Now, it's obviously a lot harder to launch for retail, because it has to do with not just yourself, but your partners having the abilities to process all that.

Who's helped Prometheum get to this point?

The preeminent force that really made us be able to do this is the law firm that incubated us, which is Gusrae Kaplan Nusbaum. They have molecular expertise when it comes to understanding not just components within securities, but understanding the rules when it comes to issuance, and also the molecular nature of broker dealers and their relationships with clearing firms. Really, what happens behind the curtains. 

Having that understanding, expertise, and support—and the ability to not be paying all the money you raise to your attorneys—has really put us in a unique spot and allowed us to distinguish ourselves. When you do things right from the beginning, it's not like you have to rebuild things: You can continue moving forward.

Where do you see Prometheum six months or a year down the road? 

We've been moving methodically since we started in September 2017, which allowed Prometheum ATS to become one of the first—if not the first—public market ATS for digital assets securities. Launching in the coming months is a major step and then also, hopefully, become a special purpose broker-dealer, and, if Prometheum Capital gets approval, then moving everything to our own custody model. These are major milestones. 

I think what you'll also see is the treatment of existing digital assets under the federal securities laws, which will hopefully allow a flourishing relationship between traditional finance and digital assets. And we're very close to that precipice, that real integration, that real connection, it's just these last final steps for which we hope to be a major contributor.