Aaron Kaplan, founder and co-chief executive of Prometheum, said the regulatory approval of its alternative trading system means the ATS will be the “only game in town” for retail investors to buy and sell digital assets once they are regulated as securities.
The US Securities and Exchange Commission has approved Prometheum Ember ATS (PEATS) to allow institutional and retail investors to trade digital asset securities, the final regulatory approval required before the ATS can launch this year. FINRA, the US regulator, has already approved the firm as a member and an ATS operator.
Gary Gensler, chair of the SEC, spoke about the regulation of crypto assets in his testimony before the United States House of Representatives Committee on Financial Services on October 5.
Gensler said large parts of the crypto sector are not operating within regulatory frameworks that protect investors and consumers, guard against illicit activity and ensure financial stability.
“Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws were enacted,” Gensler added. “This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.”
The SEC staff and other US regulators are working to bring investor protection to crypto markets under their current authorities.
“To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they qualify for an exemption,” Gensler added. “I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”
Kaplan argued that Gensler’s testimony shows that he wants crypto exchanges to register with the SEC as the overwhelming majority of digital assets they are trading are securities. Regulated securities venues have to ensure fair disclosure of information, provide investors protection and ensure there is a fair and orderly market.
“Trading on a crypto exchange is like trading without a prophylactic,” said Kaplan. “You are trading without the protections that you are supposed to be afforded.”
He expects that one day there will be an official declaration that many digital assets are securities which need to be traded on regulated venues.
“The writing is on the wall,” added Kaplan. “We are in a really strong and unique position as a regulated venue and the sky is the limit.”
Prometheum was founded in 2017 by a group of Wall Street attorneys as a blockchain-focused company to build an end-to-end ecosystem for the trading of digital asset securities. Their thesis at the outset was that securities laws would be the best avenue for transacting digital assets.
Critics have argued that regulation kills innovation but Kaplan countered that money has always been regulated and the digital asset industry has been allowed to expand without supervision.
“Regulators have allowed the sector to grow until it moved from the fringe to a mainstream concept,” he added. “Fully fledged institutional participation requires full compliance with securities laws.”
Kaplan said the firm is close to completing its testing before the ATS goes live for both retail and institutional investors to start trading.
Retail investors will be able to sign up directly with the ATS and in the future third-party broker dealers will be able facilitate trading for their brokerage customers through their existing accounts. The ATS also supports algorithmic trading strategies for institutions.
“One of the things that distinguishes us is that we have built our own trading software,” added Kaplan. “In our demonstrations regulators and institutions have been impressed with what we have built “
PEATS automates Know-Your-Customer and Anti-Money Laundering requirements and integrates traditional and blockchain technology with on-chain custody and settlement provided by Anchorage Digital Bank, the first federally chartered digital bank.
Kaplan continued that the ATS aims to be the equivalent of a public market infrastructure.
He declined to comment on the products that will be trading at launch. Kaplan said: “This is a crawl, walk, run approach.”