Crypto Rating Council Launched by Big US Exchanges to Create Framework to Assess Digital Assets

A prominent group of digital asset trading platforms have joined together to launch the Crypto Rating Council (CRC)- an entity that will rate digital asset offerings as to whether they qualify as securities under existing US law. The founding members of the Council include:

  • Coinbase
  • Kraken
  • Circle / Poloniex
  • Bittrex
  • Genesis
  • Cumberland
  • Grayscale
  • Anchorage

Kristin Smith, Director of the Blockchain Association, commented on the new Crypto Rating Council:

“In order for the crypto industry to thrive in the US we need a clear regulatory environment. Until that time, we’re pleased that industry is collaborating closely on the Crypto Ratings Council, giving entrepreneurs and investors the tools to understand the appropriate, current regulatory regime.”

The “CRC” said it intends on publishing a “points-based rating system centered around a set of factual questions” to determine if a digital asset qualifies as a security:

“Working with legal and technical experts and members of the community, the CRC distilled a set of yes or no questions which are designed to plainly address each of the four, Howey test factors: (i) whether crypto purchasers invested money, (ii) in a “common enterprise”, (iii) with a reasonable expectation of profit, (iv) based on the efforts of others. The questions are tailored to assess the characteristics most likely to impact any given crypto asset’s treatment under the securities laws. These characteristics include circumstances of the asset’s issuance, governance features, third-party contributions to the project, and practical use of the asset by the general public. The questions are also structured to allow for objective, repeatable, and fact-driven responses that can be answered consistently across different assets and across the same asset over time.”

Currently, the CRC has posted a page that delineates Assets Ratings, from 1 to 5, including many of the best-known crypto assets such as Bitcoin which receives a rating of “1” indicating it is not a security.

On the other end of the spectrum would be, for example, would be Polymath which is given a score of 4.5 indicating that it probably qualifies as a security under current law.

The CRC notes that their analysis is an independent qualification and not a legal designation. To quote:

The score does not reflect a legal conclusion and is no indication of qualitative value of an asset or suitability for investment or any other purpose. 

The CRC explains that their mission is to make it easier for members to apply the law consistently.

“The important question of whether any given digital asset is a security—as opposed to a commodity, a currency, or something else—informs critical licensing, registration, and operating obligations for financial services firms that support cryptocurrency. The U.S. Securities & Exchange Commission has issued guidance that some crypto assets may be securities while others may not be. While the SEC’s guidance has been helpful in alerting the industry to complex legal issues, determining whether any particular token is a security remains highly circumstantial and difficult to resolve even with the help of leading legal and technical experts. This complexity has led to expensive, redundant, and frequently inconsistent compliance analysis among financial services firms and has generally slowed the launch of new cryptocurrency assets in the U.S.”

The Securities and Exchange Commission (SEC) has slowly released guidance as to their approach to digital assets without providing clear cut finality as to when a digital asset should be registered as a security. Some industry advocates are pursuing a legislative fix to better define digital assets and, perhaps, creating a rule to allow for utility type crypto assets which may trade but not fall under US securities law.

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