The heavy hand of regulators has been stifling the growth of the cryptocurrency industry in the U.S. and caused innovators to flock abroad. In a bid to mitigate one aspect of this problem, major players have now created a joint system for rating what constitutes a security token.
A group of digital finance companies has announced the formation of the Crypto Rating Council, a member-operated organization created to help market participants comply with U.S. federal securities laws. The founding members of this new industry body are Anchorage, Bittrex, Circle, Coinbase, DRW Cumberland, Genesis, Grayscale Investments and Kraken.
The purpose of the Crypto Rating Council is to provide a joint assessment of whether a specific token should be considered a security under U.S. law. This definition has direct legal implications on companies that trade and manage digital assets in the U.S., but reaching this decision can be costly for any one company as it requires the assistance of expensive lawyers who specialize in such matters. Moreover, as it is a fuzzy legal definition and not a matter of code, different lawyers might reach different conclusions. A joint effort should help companies deal with the lack of clear-cut rules from the U.S. Securities and Exchange Commission (SEC).
Bill Shihara, the CEO of Bittrex, stated: “The Crypto Rating Council’s mission of operationalizing SEC guidance is one that deeply resonates with Bittrex, and me. Today’s regulatory complexity and uncertainty creates a challenging environment for emerging US blockchain technologies. By uniting as a Council to set industry standards and help clarify regulatory guidance, we can reinvigorate responsible blockchain and cryptocurrency growth in the US.”
The Securities Rating Framework
In order to judge whether an asset is a security, experts are asked a number of questions that are derived directly from SEC guidance and relevant case law. These are designed to address important characteristics such as the usage of securities-like language, the sale of tokens or token interests prior to the existence of token utility, marketing of the token suggesting an opportunity to earn profits, and decentralized development and usage.
The Crypto Rating Council’s analytical framework results in a score between 1 and 5. A score of 1 means the asset has few or no characteristics consistent with a traditional regulated security while a score of 5 means that an asset has many characteristics strongly consistent with treatment as a security. For example, Monero (XMR) got a 1.0 rating and Ripple’s XRP got a 4.0.
“Coinbase is proud to bring together many of the largest and most credible companies in the cryptoeconomy to implement the first industry wide crypto rating system,” commented Chief Legal Officer Brian Brooks. “Like the Motion Picture Association’s system for rating movies, this new system will provide clarity and a common language for assessing important aspects of individual cryptoassets—in this case, securities law compliance.”
What do you think about industry players forming the Crypto Rating Council? Share your thoughts in the comments section below.
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Avi Mizrahi is an economist and entrepreneur who has been covering Bitcoin as a journalist since 2013. He has spoken about the promise of cryptocurrency and blockchain technology at numerous financial conferences around the world, from London to Hong-Kong.