Prometheum blends the best of the old and new worlds, its cofounder and co-CEO Aaron Kaplan believes. As it builds out a public markets infrastructure on top of blockchain technology, it looks to existing securities regulations as its guide.
Mr. Kaplan said he has long been intrigued by distributed ledger technologies, but it wasn’t until Ethereum with its smart contract capability debuted that the technology existed to bring about his goal of building a better capital markets system. That was the missing piece, for much of the rest was already in place.
“Our belief is the federal securities laws provided the best framework of issuance, trading, clearance and unlimited custody of digital assets,” Mr. Kaplan said.
The SEC’s goals are investor protection, fair and orderly markets and full and fair disclosure, he explained. That provides a strong framework from which to begin.
Sounds simple but crypto’s early years show it’s anything but. Consider the numerous ICO scams and the many companies who believed they could revolutionize the markets while paying little heed to the regulations and why they were in place. It wasn’t a case of the markets catching up as much as it was smarter people figuring out how to reach the same goals by playing within the rules.
“If you want to extend that thought a little bit you can argue the SEC would be the best entity to regulate these activities and therefore the federal securities laws would be the best frameworks for everything to occur,” Mr. Kaplan said.
Prometheum exists at the intersection of three areas, Mr. Kaplan explained. The first are the founders’ strong backgrounds in securities regulation as C-suite securities attorneys. They have good experience across the board in all important areas.
Then there is the financial services sector.
“What we’re doing is incorporating the benefits of distributed ledger technology into capital markets infrastructure which operates on a regulated environment which is brokerage infrastructure,” Mr. Kaplan said. “Licensed entities, broker-dealers, ATSs and clearing houses need experience.
“We had owned brokerage firms and clearing firms so we understood the brokerage side not just on a ‘why you need this from a business standpoint’ but on a day-to-day operational standpoint.”
The third factor was an early belief in the power of blockchain. While admittedly not a big believer in virtual currencies, Mr. Kaplan did help found a digital asset startup which provided him a great introduction into the space. Add in CTO Gareth Jenkins’ detailed knowledge of systems architecture and they were ready to go.
“That was the final component – how you would actually use the blockchain to make things better,” Mr. Kaplan said. “At that time you had all these companies say ‘we’re going to be a blockchain this or that’ and it’s incredible nonsense. You can actually make systems better you can actually make the capital markets infrastructure better… anything that involves the creation, the trading and the processing of an asset such that you need settlement and finality you can actually make better than what’s out there currently.”
Take his comments together and it’s easier to see where so many went wrong, whether it be in digital securities, or even in crowdfunding and P2P. Filled with hubris, so many thought they’d build something so revolutionary, they’d make Wall Street come to them. That’s not how it turned out.
“Coming from the Wall Street side, you want the existing Wall Street side to integrate into the digital asset universe,” Mr. Kaplan said. “What you realize is you’re just building a better apple cart. You’re not just going to be servicing the new digital asset universe, and the compliant digital asset universe, but traditional securities are going to migrate to the blockchain as well.”
Think of it as more of an evolution than a revolution, Mr. Kaplan suggested, adding he believes this is the biggest upgrade in capital markets since the onset of electronic trading. Look at the data generated at different points in the trade life cycle, he said. Make a trade and the brokerage firm has data. That goes to the ATS or exchange and there’s more added. With every step the data pile grows, all in its own silo with plenty of human reconciliation thrown in.
It’s a recipe ripe for an update.
“It’s very obvious how you make things better,” Mr. Kaplan said. “You just issue assets on chain, then put distribution on chain that has wallets being in distribution that represents brokerage accounts, then list it on the market or ATS. The ATS writes the trade data on the blockchain which is reconciled via smart contract against the settlement transaction at the custodian or clearing firm.
“It’s a cleaner process.”
For that evolution to be completed the technology has to be open to all, too.
“We will be a public market and that’s what you need for digital assets to go mainstream,” Mr. Kaplan said. “You can’t just be limited to accredited investors and institutions and be limited to exempt securities. It just doesn’t work.”
Build the links so people can invest through their existing accounts. Those ramps are very important.
I asked Mr. Kaplan for his views on the tokenization of everything from baseball cards to art to fancy cars. Some bring issues with potential commercial transaction issues, but if they are compliant and it makes sense he’ll keep an open mind.
Regulation is not to be feared, Mr. Kaplan concluded.
“From our perspective regulation is a sword and shield. What you heard initially in this space is regulation kills innovation.
“When people have that mentality I sort of smile. It makes our position stronger because regulation is not just a defensive position such that you protect investors, it’s an awesome offensive weapon in that if you’re able to leverage regulation you can actually innovate based on the regulation.”
