The House Financial Services Committee heard testimony from experts and insiders yesterday on the burning question of the best way to regulate digital asset markets, said Aaron Kaplan, co-founder and CEO of Prometheum, a FINRA and SEC regulated ATS and broker-dealer in digital asset securities. However, the SEC’s approach to crypto market structure has been described as a classic instance of malicious bureaucracy, a Catch-22 coined by novelist Joseph Heller.
The SEC’s stance is an inescapable Catch-22: You’re free to launch a regulated crypto exchange, as long as it doesn’t actually enable the purchase or sale of crypto. This point was driven home by Representative Mike Flood (R-NE), who asked Kaplan if Prometheum allows users to buy and sell ether (ETH) or bitcoin (BTC). Kaplan’s answer to each question was a curt, embarrassed no.
Prometheum has not yet identified any assets that it plans to offer, and currently only plans to serve accredited investors, not the general public. This highlights the hollowness of the SEC’s claims that existing law provides a path to registration for crypto exchanges. Lawyer Coy Garrison, former counsel to SEC Commissioner Hester Peirce, pointed out that this means the SEC is advocating an utterly incoherent market structure for crypto assets. Blockchain Association CEO Kristin Smith added that the SEC’s approach ignores that these tokens have a function.
The SEC has no obligation to craft a set of classifications that better fit the way crypto works, but the Catch-22 of crypto market regulation is clear: If you want to get properly registered as a crypto exchange, you won’t be able to offer the most popular and important digital assets.