SEC’s regulations on dangerous crypto are an uneven mess

Charles Gasparino

Business

By Charles Gasparino

June 17, 2023 | 9:22pm

Gary Gensler’s regulation of cryptocurrency has been highly scrutinized.
AP

Securities and Exchange Commission Chair Gary Gensler’s regulation of crypto is an uneven mess; digital-coin exchanges get approved by the commission to go public, only to be sanctioned later for selling crypto the agency doesn’t like. The securities laws aren’t clear if he has necessary legal authority to weigh in as he has done, but that hasn’t stopped Gensler from bringing a slew of cases.

There is a decent case to be made Gensler’s regulatory agenda is dangerous as well, and not just for the usual reasons involving aggressive enforcement that could crimp crypto’s possibly revolutionary blockchain technology. It’s also because the SEC, known as Wall Street’s top cop, has been looking lately like a band of keystone cops.

Consider the strange case of a company called Prometheum that critics allege appears to have slipped through some very large SEC cracks to become a thing in the $1 trillion crypto business.

The co-founder of Prometheum, Aaron Kaplan, made some news this past week. He got a prime speaking spot during a House Financial Services Committee crypto hearing to tout a major achievement of his little-known outfit. Yes, Gensler pretty much hates crypto and he has said as much. But he apparently really likes this company, so much so that his SEC granted Prometheum status as the first “special purpose broker-dealer for digital assets.”

Sam Bankman-Fried was arrested over his mismanagement of FTX.

REUTERS

That’s a big deal. Recall, before disgraced FTX founder Sam Bankman-Fried was arrested, he was the king of crypto and sought such a designation from Gensler. US discount broker Robinhood wanted one as well because it allows you to buy and sell crypto for clients without fear of SEC reprisal. In Robinhood’s case, some crypto types believe they got the stiff arm from the SEC because Bankman-Fried, a major Democratic Party donor, was Gensler’s favorite child, until SBF blew up, of course, under Gary’s nose.

The US-based Coinbase exchange also sought something similar to Prometheum but was rebuffed, possibly because the SEC was ready to pounce as it did two weeks ago, charging the exchange with “unlawfully facilitating the buying and selling of crypto asset securities.”

That said, a case can be made that Robinhood and even Coinbase should have a leg up on the competition for the status granted Prometheum. Both survived the SEC’s IPO disclosure process and are listed on the Nasdaq stock market. They are well-known entities in regulatory circles.

Privately owned

What are Prometheum’s qualifications? It’s not a public company; it’s privately owned by Kaplan, his family, and others. Robinhood employs 2,300 people, Coinbase 3,500. Prometheum is said to employ around 25. Its headquarters appears to be in an unassuming office on Wall Street, which for the unacquainted is no longer the place where the big banks reside these days.

Goldman Sachs and JPMorgan worked with Robinhood and Coinbase.

One of Prometheum’s underwriters is a firm called Network 1 Financial, with offices that appear to be located in Red Bank, NJ., inside a high-end mall (the company didn’t respond to a request for comment). Network 1, according to its FINRA records, has 18 so-called “regulatory events,” resulting in around $250,000 in penalties, by my reading of the case summaries, over the past three decades.

Prometheum’s filings show no regulatory infractions, but a March 28, 2019, disclosure with the SEC says the company has ties (aka “strategic partners and joint venturers”) with a Chinese outfit called “HashKey.”

Some critics said that Prometheum is not being properly regulated.

Now follow me here. Someone named “Dr. Feng Xiao” is the chairman of HashKey as well as vice chairman and executive director of China Wanxiang Holding Co. Ltd.

Sen. Tommy Tuberville (R-Ala.) in a letter to Gensler said, “Wanxiang Group has a long history of close ties to the CCP,” aka the Chinese Communist Party. And it still does. The firm is now run by someone named Lu Weiding, who a company press release noted “will . . . always listen to the Party and follow the Party.”

Tuberville says Prometheum’s ties to China raise the same issues Republicans have raised about the Chinese-owned short-video app TikTok, or in his words, “serious concerns related to investor protection, data privacy, national security.” He added the SEC must end its “willingness to continue to allow entities with links to the CCP to operate in the United States.”

Kaplan, in a lengthy statement to The Post, said his Chinese partners no longer play a role in the development of Prometheum’s technology; its ties to Chinese have been vetted without censure by two US government agencies “Wanxiang and its affiliates have no access to any Prometheum code . . . customer data,” etc., “Prometheum is proud to be an American-born, bred, and controlled company.”

Gensler’s people, meanwhile, declined my request for comment, but the chairman was recently interviewed on CNBC and gave Prometheum an “attaboy” for coming to the SEC and seeking proper registration while agreeing not to trade crypto he believes violate the law.

Gensler might like Prometheum, but on social media, crypto types are skeptical. They can’t seem to figure out why the SEC likes these guys so much, or what the company actually does. Its CEO brags its platform will trade only SEC-sanctioned digital assets, which means those assets that have gone and registered with the SEC. But as far as I can tell, none of the major crypto in circulation maintains that designation, certainly not Bitcoin or Etherium, the two most popular digital coins.

Whatever’s under the hood, let’s hope Gensler hasn’t missed another FTX.