Brought to you by:

Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:

• Prometheum defends its stance on which crypto tokens are securities. 

• State Street takes another step in its crypto journey. Spoiler: Tokenization is still key.

• It’s a good day to own SDIG shares as mining M&A continues.

The Prometheum Test

Prometheum Capital has plans to add Uniswap’s UNI and Arbitrum’s native ARB to the custodial platform it intends to launch in the coming weeks, the company said Wednesday. 

Prometheum has been making waves since May 2023 when it became the first company to receive a special-purpose broker-dealer license to custody digital assets. The approval from the SEC and FINRA caused quite a stir, mostly because others (Coinbase and Robinhood) said they’d been trying to secure an SPBD for years. 

“When [SEC Chair Gary] Gensler said ‘come in and register,’ we did,” Dan Gallagher, Robinhood’s chief legal, compliance and corporate affairs officer, told lawmakers during a July 2023 House hearing. “We went through a 16-month process with the SEC staff trying to register as a special-purpose broker-dealer and then we were…told in March that that process was over and we would not see any fruits of that effort.” 

The Blockchain Association called Prometheum’s license a “sweetheart deal” and four Republican Congressional leaders demanded a DOJ investigation into how and why the company got the regulatory green light. 

Prometheum co-CEO Aaron Kaplan has defended the SPBD license, saying in July 2023 that crypto firms not registered with the SEC and FINRA are “simply not willing to comply.” 

Sounds like he may have taken a page from Gensler’s book.

Controversy aside, Prometheum has the license, which permits it to custody crypto securities. Translation: Prometheum thinks ETH, ARB and UNI are securities. 

I asked Prometheum what it is about these three tokens that classifies them, in its mind, as securities versus commodities. Its representative replied: 

“The determination of whether a digital asset is a security or a commodity is a nuanced and complex legal matter that is ultimately within the purview of regulators. Prometheum Capital’s focus is on ensuring that we comply with all applicable regulations and provide a platform for investors to responsibly participate in the digital asset space.” 

This part sticks out: “ultimately within the purview of regulators.”

To me, it sounded like Prometheum received some sort of assurance from the SEC that UNI and ARB are securities. The representative told me this was not the case. 

Prometheum has its own compliance team that determines what is a security. Should the SEC ever come out with a contradictory ruling, Prometheum would delist tokens or react as necessary, the spokesperson added.

What’s also interesting here is that the SEC dropped its investigation into Consensys in June — noting it would not bring charges related to the blockchain ecosystem’s sales of ETH as securities transactions. The decision, which the Ethereum community took as a massive win and a sign the SEC in fact sees ETH as a commodity, did not deter Prometheum. 

To answer Consensys attorney Bill Hughes’ burning question: the Prometheum rep told Blockworks there are no plans to remove ETH from its list of available tokens. 

The custodial platform set to launch by the end of next month could include some more tokens, so keep an eye out.

— Casey Wagner

The percentage of corporate money given to 2024 election efforts that has come from crypto companies, according to a new report from non-profit Public Citizen. Crypto businesses have contributed roughly $119 million to PACs and other campaign efforts this election season. 

As we’ve covered in this newsletter before, the big corporate crypto donors have been Coinbase and Ripple — so far distributing $50.5 million and $49 million, respectively. 

Blockworks Research is conducting a survey to gain insight into the institutional staking landscape. This data will help industry leaders adopt their strategies as the industry matures.

If you're an institutional staker, we want to hear from you (and if you’re new to Blockworks Research, get 20% off of our service while you’re at it!)

State Street on Tuesday reiterated its mission after partnering with crypto infrastructure provider Taurus: “Be the bridge between traditional finance and digital innovation.”

This vision, as told to me by State Street product chief Donna Milrod, is not exactly a surprise. But it reaffirms that TradFi’s crypto- and blockchain-related involvement is no fad. 

The financial titan has been around the crypto block, so to speak. 

State Street formally launched its digital finance division in June 2021 — marking a “tripling down” on innovation, State Street exec Nicole Olson previously told Blockworks. 

More recently, State Street’s $4 trillion-plus asset management arm joined forces with Galaxy Digital to propose “the next generation of digital asset-based strategies” in an ETF wrapper.

Now, the link-up with Taurus allows the bank to add tokenization and digital custody offerings to its existing crypto-focused administrative and accounting services.

Not to mention it lets State Street interact with other clients that use Taurus’ platform. Notably, Deutsche Bank (one of Taurus’ financial backers) said last year it was set to establish crypto custody and tokenization services with Taurus’ help.

As for near-term product priorities, State Street is “actively pursuing tokenization of traditional assets and funds,” Milrod noted.  

She added that clients want to take advantage of various blockchain-related benefits: new distribution channels, atomic settlement, 24/7 trading and collateralization.

“They want to participate in the tokenized securities that are being issued on different private permissioned, public permissioned and public permissionless blockchains, and expect State Street to support them,” Milrod explained. 

BlackRock and Franklin Templeton already offer tokenized money market funds. TradFi’s biggest players continue to explore use cases for blockchain tech.

We will keep monitoring State Street and its competitors, all of which clearly have the muscle to be leaders in this category.

— Ben Strack

Holders of Stronghold Digital Mining stock had a good Wednesday. 

Shares of SDIG had surged 72% on the day to $5.05, as of 2:30 pm ET. The rally can be attributed to news that fellow bitcoin miner Bitfarms would acquire the company.

The “transformative” deal came after “years of ongoing discussions,” Bitfarms CEO Ben Gagnon said. It could help the acquirer reach 950 MW of power capacity by the end of 2025.

Stronghold executives seemed plenty annoyed about the miner’s share price during a May earnings call. SDIG’s stock price was $3.16 at noon that day, down 52% year to date.

The execs’ course of action at the time? Launch a strategic review process and consider selling its assets, or the company outright. Three-plus months later, Stronghold’s done the latter. 

Bitfarms itself had fielded offers to be acquired, rejecting a so-called “hostile bid” by Riot Platforms earlier this year. 

Architect Partners’ Elliott Chun told Blockworks the Bitfarms-Stronghold deal represents various segment themes continuing to play out.

One is the ongoing competition to become the largest publicly traded miner, with M&A offering one way to do so. Many expected the fourth Bitcoin halving in April to create buying opportunities for the space’s better-performing players.

CleanSpark, for example, has been among the most active acquirers, buying facilities and agreeing to purchase GRIID Infrastructure.

Then there are the miners continuing to expand their revenue streams, specifically as it relates to HPC and AI. Stronghold’s access to the PJM grid gives the combined company a chance to use that power for BTC mining or HPC-AI functions, Bitfarms said Wednesday.   

Chun noted: “The AI and crypto convergence thesis will continue, with future M&A coming.”

— Ben Strack

Hear executive leaders from Galaxy, BlackRock, and Coinbase on what they think about the future of crypto in the US. Join us at Permissionless.

• Preliminary estimates from the Bureau of Labor Statistics suggest there were 818,000 fewer jobs in March 2024 than were initially reported. The annual data revision was published uncharacteristically late Wednesday morning and fueled fears that the labor market is not as healthy as markets initially believed. 

• NBA star Jimmy Butler and crypto influencer Ben “BitBoy” Armstrong have reached a preliminary settlement agreement in their lawsuit with Binance investors, who claim the two promoted unregistered securities sold on the platform. The collective settlement amount, if approved by the court, would be $340,000. 

• The SEC appears on track to file fewer crypto-related enforcement actions in 2024 than it has in past years. The agency has brought just nine enforcement actions year to date, compared with the 46 brought in 2023.