U.S. House Financial Services Committee Chairman Patrick McHenry (R-NC) has led Republican members in probing the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) over what they call the “shady approval” of Prometheum as the first and only special purpose broker-dealer (SPBD) for digital assets. In letters dated August 9, the lawmakers demanded all documents and communications related to Prometheum's application, citing a lack of customers, an absence of operational track record, and ties to the Chinese government.
Background: The SPBD Framework and Prometheum's Approval
The SEC created the SPBD category in 2020 to allow firms to custody digital asset securities under existing securities laws. FINRA approved Prometheum Ember Capital LLC in May 2023, making it the first firm to receive such a license. However, several other applicants remain pending. The lawmakers stressed that Prometheum “has not yet served a single customer” and has refused to disclose which digital asset securities its alternative trading system (ATS) would support. Additionally, Prometheum currently lacks the capability to perform clearing or settlement services, which are essential for operating an ATS. “It is unclear why FINRA would have chosen to approve a firm with no operating history and no track record of serving customers over all the applications that it has received,” the lawmakers wrote.
Chinese Government Ties and National Security Concerns
The lawmakers raised serious national security and data privacy concerns, noting that Prometheum has ties to the Chinese government. Representative Scott Fitzgerald (R-WI) tweeted: “It’s concerning that SEC Chair Gensler’s first and only approval of a special purpose broker-dealer for digital assets was done for a company with strong ties to the CCP. I joined the Financial Services Committee in demanding transparency around this decision.” Representative Ritchie Torres (D-NY) had previously called for an investigation into the SPBD license granted to Prometheum, highlighting potential risks to U.S. financial sovereignty and data privacy.
Suspicious Timing: Legislation Avoidance?
The approval came just as the House Financial Services Committee was considering legislation to establish a comprehensive regulatory framework for digital assets. The bill was released on June 2, 2023. Lawmakers suspect that the SEC and FINRA may have approved Prometheum to demonstrate that no new legislation is needed because a “workable regulatory framework” already exists for digital asset custody. “The timing of the approval raises concerns that it was aimed at showing that legislation is not needed,” the letter states. “We demand a full accounting of how this decision was made and why it was rushed through while other applications languish.”
The committee has set a deadline of August 22 at 5:00 PM for the SEC and FINRA to produce all internal documents, including employee communications, memoranda, and decision logs dating back to 2019. This escalation marks a significant battle between Congress and financial regulators over the future of digital asset oversight, with Prometheum at the center of a controversy that threatens to undermine trust in the regulatory process.