Prometheum’s Ethereum Custody Launch Sparks Debate Over Asset Classification

Prometheum, a digital asset trading and custody firm, soft-launched its Ethereum (ETH) custody service on Friday, May 17, 2024, with a full-scale launch expected in June.

The move has reignited the debate surrounding the classification of cryptocurrencies, as Prometheum’s service treats Ethereum as a security under the purview of the U.S. Securities and Exchange Commission (SEC).

TLDR

Prometheum launched Ethereum custody services on Friday, classifying ETH as a security under SEC regulations.
The move sparked controversy, with some accusing Prometheum of working with the SEC to misclassify Ethereum.
The SEC has not officially declared Ethereum a security, but is accused of internally operating under that assumption.
Speculation arose that the SEC might approve spot Ethereum ETFs, which would classify ETH as a commodity, not a security.
Prometheum’s custody launch represents a test of the company’s strategy to offer compliant crypto trading under existing securities laws.

The launch of Prometheum’s Ethereum custody service has drawn criticism from the crypto community, with some accusing the firm of collaborating with the SEC to misclassify Ethereum.

The Cedar Innovation Foundation, a crypto advocacy group, stated,

“This announcement is simply the latest attempt orchestrated by the SEC to drive the crypto market out of the United States. The SEC and Prometheum stand alone in their claim that ETH is a security.”

While the SEC has not officially declared Ethereum a security, there are allegations that the agency has been internally operating under this assumption.

In April 2024, Ethereum software giant Consensys filed a lawsuit against the SEC, seeking confirmation that Ethereum is not a security.

The unredacted portions of the lawsuit revealed that the SEC had been considering Ethereum as a security since March 2023.

The classification of Ethereum as a security by Prometheum conflicts with the views of other U.S. financial regulators, such as the Commodity Futures Trading Commission (CFTC), which has asserted that Ethereum is a commodity.

This discrepancy has raised concerns about the potential consequences for U.S. financial market rules.

Hopes for Spot Ethereum ETFs

Despite the controversy surrounding Prometheum’s custody service, speculation has arisen that the SEC might soon approve spot Ethereum exchange-traded funds (ETFs).

Bloomberg ETF analysts Eric Balchunas and James Seyffart have raised their approval odds from 25% to 75%, citing potential political pressure as a motivating factor for the SEC’s change in posture. The proposed ETFs classify Ethereum as a commodity, not a digital asset security.

Prometheum, founded by brothers Aaron and Benjamin Kaplan in 2017, has taken a contrarian view on crypto regulation, arguing that a clear legal path already exists to trade crypto under existing securities laws.

The company secured a broker-dealer license from the SEC and the Financial Industry Regulatory Authority (FINRA) in June 2023, allowing it to custody digital asset securities.

Aaron Kaplan, co-CEO of Prometheum, believes that the launch of Ethereum custody services “eliminates a lot of the arguments that things can’t be done under existing laws.” He added, “It marks the first time that…an investment contract digital asset security is being custodied and treated under the securities laws.”