Yesterday the newly formed Crypto Rating Council (CRC) released its first batch of 20 digital asset ratings. The CRC consists of 8 large companies in the space: Coinbase, Kraken, Bittrex, Circle, Grayscale, Genesis, Cumberland and Anchorage. The group was founded according to their website, around a shared commitment to ‘responsible growth and maturation of cryptocurrency markets and related financial infrastructure and trading services’.
We formed the Crypto Rating Council to create a framework to consistently and objectively assess whether any given crypto asset has characteristics that make it more or less likely to be classified as a security under the U.S. federal securities laws.
Assets are ranked from 1–5 with 1 being defined as an asset that has few or no characteristics consistent with treatment as a security and 5 as an asset which has many characteristics strongly consistent with treatment as a security. The CRC is clear that its verdict is not definitive in nature and has not recieved endorsement from the SEC or any other government body. It also does not account for the legal position on assets outside of the US.
The CRC’s analytical framework is based on relevant law and statements from SEC Staff relating to digital assets, including the SEC’s “Framework for Investment Contract of Digital Assets.” Neither the scores nor our framework constitute an exhaustive treatment of the legal and regulatory issues relevant to conducting an analysis of whether a product is a security.
The groups research found only Bitcoin, Litecoin, Monero and Dai matched the criteria of not being a security and achieving a score of 1. This is something many users had already suspected, but hearing it from the key players in the space provides further reassurance going forward. Litecoin’s Founder Charlie Lee responding the the news stating:
Although it’s been clear to most that Litecoin is not a security, it’s still good to see the Crypto Rating Council agree.
The CRC’s notes attached to these assets noted the absence of any token sale aswell as decentralised development and usage. On the other-side of the scale assets including XRP, Polymath and Maker all scored 4 or above with a further 8 assets scoring 3.75. Securities typically represent an ownership position in a company or corporation something that comes with a whole host of further government regulations to protect investors.
Many of these projects sold themselves on not being securities or controlled by the companies that were setup to build them. BlockOne the private company behind EOS (which scored 3.75) has recently been fined $24m by the SEC for conducting an unregistered ICO that raised $4bn. If the SEC later agrees with the CRCs finding then a majority of the projects reviewed are at risk of being found to have committed securities fraud by misleading investors. This may result in large fines or incarceration of those involved but perhaps most damaging would be to these projects images and futures.