House GOP Pressures SEC To Clarify Ethereum’s Security Designation For Prometheum’s Custody

In a joint effort, Republican lawmakers led by House Financial Services Committee Chair Patrick McHenry and House Agriculture Committee Chair Glenn Thompson have called upon Securities and Exchange Commission (SEC) Chair Gary Gensler to provide further clarification on the agency’s stance regarding the custody of Ethereum (ETH) by Prometheum. 

The lawmakers, including Representatives French Hill, Dusty Johnson, Tom Emmer, and Warren Davidson, expressed concerns over the lack of transparency in the SEC’s Special Purpose Broker-Dealer (SPBD) regime and the potential ramifications of allowing Prometheum to proceed with its custody services for ETH.

Recognition Of Ethereum As Non-Security

In their letter sent on Tuesday, the lawmakers emphasized the SEC and Commodity Futures Trading Commission’s (CFTC) previous recognition of Ethereum as a non-security digital asset. 

Based on this precedent, they pointed out that the SEC’s current regulatory framework does not permit SPBD custody of non-security digital assets. The lawmakers also warned that allowing Prometheum to proceed under these circumstances could have “irreparable consequences” for the digital asset markets.

The Republican lawmakers urged Chair Gensler to clarify the SEC’s position on several key aspects, including the ability of SPBDs to custody non-securities, the SEC’s approach to addressing SPBD non-compliance, Ethereum’s regulatory classification, and the SEC’s specific stance regarding Prometheum’s recent announcement.

The letter further raised concerns about the lack of a clear definition for “digital asset securities” and the SEC’s failure to provide comprehensive guidance or propose rules for asset classification within the digital asset marketplace. 

The lawmakers also expressed their disappointment with Chair Gensler’s refusal to acknowledge Ethereum as a non-security digital asset, stating that his “unwillingness” to clarify the treatment of ETH has contributed to the confusion and uncertainty surrounding its classification.

Lawmakers Urge Resolution

The lawmakers criticized the SEC for creating “uncertainty” among regulated entities by failing to identify which digital assets should be considered “digital asset securities.” 

They referenced temporary frameworks established to facilitate trading and custodial services for digital asset securities. The SEC’s Division of Trading and Markets issued a no-action letter to FINRA in September 2020 outlining conditions for registered broker-dealers to operate an Alternative Trading System (ATS) trading digital asset securities. The letter further reads:

Despite this history of recognizing Ethereum as a non-security digital asset, you have consistently refused to acknowledge that ETH is not a security. In your March 2023 testimony before the House Committee on Financial Services you declined to answer multiple questions about whether ETH should be considered a commodity. Your unwillingness to clarify the treatment of ETH only exacerbates the confusion and uncertainty regarding ETH’s classification as demonstrated by the Prometheum announcement.

Ultimately, the letter stressed the need for regulatory clarity and a comprehensive approach to digital asset classification to minimize uncertainty and foster growth within the digital asset ecosystem. 

They called on Chair Gensler to address their concerns promptly, considering the potential implications for market participants and the broader digital asset markets. 

Chair Gensler and the SEC have yet to respond to the letter formally, but the industry awaits further developments as the regulatory landscape for digital assets continues to evolve.

Featured image from Shutterstock, chart from TradingView.com