Digital Assets: Chair of House Financial Services Sends Letter to SEC, FINRA Questioning Prometheum Relationship, Says Investor Has Ties to CCP

The Chair of the House Financial Services Committee, Representative Patrick McHenry, along with other Committee Republicans, have sent a letter to the Chair of the SEC, Gary Gensler, as well as the FINRA President Robert Cook, questioning the relationship with Prometheum and the approval for a Special Purpose Brokder Dealer (SPBD) that allowed for digital asset securities.

In a hearing this past June, the Committee addressed the topic of The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem. Prometheum co-founder and CEO Aaron Kaplan was a witness at the hearing. In prepared testimony, Kaplan focused on “digital asset securities” and operating under the established regulatory regime as overseen by the SEC. Kaplan stated:

“There has been much discussion lately about the need for greater regulatory clarity for digital assets. The essential point at hand is not about more or less regulation or even new regulation, but rather the application of the existing regulatory frameworks to digital assets.”

The narrative bucked the industry mission of providing rules for non-security digital assets, a goal shared by many Committee members.

The letter by Committee Republicans notes that Prometheum was approved for an SPBD on May 17th – just before the hearing. And while other entities have applied for the same approval, Prometheum remains the only entity that is approved for the framework.

The letter adds that the new SPBD, established in 2020, was designed to allow for the custody of digital asset securities. Yet until this past May, the option had been unutilized.

The letter states:

“The timing and circumstances surrounding the approval of Prometheum as the first SPBD raise serious questions. The approval comes as the Committee is considering addressing gaps in the regulation of digital assets. The Committee held a joint hearing just seven days prior to the approval between the House Financial Services Committee and the House Agriculture Committee entitled, “The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets.” In that hearing, members discussed their plan to propose legislation on digital asset market structure. The legislation was ultimately released on June 2, 2023. The timing of the approval raises concerns that it was aimed at demonstrating that legislation is not needed because there is a workable regulatory framework for the custody of digital asset securities.”

The letter goes on to claim that Prometheum has a relationship with an investor with ties to the Communist Party of China (CCP):

“According to SEC filings, a representative of that entity, Feng Ziao, serves as a Director in Prometheum. Wanxiang [ a former blockchain partner of Prometheum] has deep ties to the Chinese Communist Party (CCP).”

The letter adds that 20% of Prometheum is owned by a Chinese entity.

The Committee Republicans request that the SEC and FINRA provide answers to various questions, including if the risk of affiliation with the CCP was considered. And how many other SPBDs for digital assets are outstanding but unapproved?

The letter states that Prometheum is yet to serve a single customer.

McHenry and the Republicans demand a response by August 22, 2023.


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