Crypto Rating Council
While there are many hurdles that need to be cleared in the world of blockchain, there continues to be a recurring question that has plagued companies big and small.
What makes a token/coin a security?
This is not a simple question to answer, despite the SEC’s continuing stance that the existing regulations are clear.
In an effort the help both, companies and investors alike, a group of industry leaders have formed, what they are calling, the ‘Crypto Rating Council’. This council has taken it upon themselves to create a framework designed to ‘objectively assess whether any given crypto asset has characteristics that make it more or less likely to be classified as security in the U.S. federal securities laws’.
The ‘Howey Test’, which refers to a set of rules determining if an asset is a security, was long ago established by the SEC.
As this test is still the primary basis, to this day, for determining an asset’s status, the Council has structured their own framework around it. The council indicates that this developed framework, as a whole, looks at these assets through the same lens as the SEC. In doing so, they state that there are dozens of yes/no questions that they apply when determining asset classification.
Various noteworthy companies involved with blockchain form the founding members of the Crypto Rating Council. The following are only a few, listed by Coinbase, to be taking part.
While the list of assets evaluated will continue to grow, the Council has launched their initial ratings with of 20 popular tokens/coins already evaluated.
Once looked at through their developed framework, the assets are given a rating, which indicates the likelihood of the asset being deemed a security. These ratings range from 1-5 (5 being the most likely to be deemed a security). In their initial 20 ratings, there were a few noteworthy assets living on the extremes.
A few assets receiving a 1 (not a security), include Bitcoin, Litecoin, and Monero.
A few assets at the other end of the spectrum (most likely a security), receiving a 4.5, include POLY, XRP, and Maker.
Unsurprisingly, the SEC has stated in the past that they do not view Bitcoin as a security, justifying the 1/5 it received. Also unsurprisingly, assets such as XRP received a 4.5/5. This is not unexpected, as Ripple is in the midst of an ongoing lawsuit which would see XRP deemed a security.
Why it is Needed
Clearly, despite the SEC saying otherwise there is still industry confusion with regards to what constitutes a digital security. If this were not the case, we would not see nearly as many instances of these assets being improperly distributed. It is also important to note that it is not just ‘mickey-mouse’ companies being caught doing this – there are also well funded teams still falling into the trap.
While the council does not hold any true authority, hopefully, they will be able to at least provide some level of guidance moving forward to companies looking to distribute a digital asset.
On behalf of themselves, and the others joining them in the Council, Coinbase commented in a blog post on their announcement. The following is what they had to say on the importance of legal characterization, along with expected growth moving forward.
“The proper legal characterization of a crypto token — as a currency, a commodity, a security, or something else — can have a meaningful impact on how crypto businesses operate. Whether a token is a security under U.S. federal securities laws, in particular, will significantly impact registration, licensing, and operating obligations for financial services firms that offer crypto services like exchange, investment management, or trading.”
“In the coming months, we expect to add more members, review more assets, and publish more and revised asset scores. As we continue to grow, we may develop similar tools for non-U.S. jurisdictions.”
In the past year, we have reported on various events entailing the SEC laying charges upon companies. These have primarily stemmed around the improper issuance of what the SEC believes are securities. The following are a few examples of this, along with companies that could have very well benefited from a service now being created by the Crypto Rating Council.