The leading cryptocurrency businesses work together on the CRC (Crypto Rating Council) to evaluate and rate digital assets on whether or not they are securities.
Who is on the Crypto Rating Council?
Since the CRC was first founded, digital asset trading platform CrossTower, crypto exchange OKCoin, blockchain developer RADAR, and social trading network eToro have all joined the council.
What does the Crypto Rating Council do?
The CRC evaluates crypto assets to determine whether or not they can be designated as a security versus a currency, commodity, or something else. The Council uses a 1 to 5 rating system to rank the asset. A 1 rating means the digital asset isn't a security and a 5 rating means it's definitely a security.
For example, Bitcoin has a 1 rating and Ethereum has a 2 rating. Looking at the asset ratings published on the CRC website, none of the crypto assets that the council has reviewed has received a 5 rating yet. The closest was the cryptocurrency XRP, which received a 4 rating.
Whether or not a digital asset is a security can impact how crypto businesses operate. A token considered a security under federal securities laws could impact registration, licensing, and operating obligations for financial firms that offer crypto services like exchange, investment management, or trading, the CRC website states.
The Crypto Rating Council isn't endorsed by the SEC.
The CRC points out that its rating system isn't endorsed by the SEC or any other regulatory authority. Digital assets can still be classified as a security by the SEC regardless of the CRC rating, the CRC website states.
The SEC does provide some guidance on what makes a crypto asset a security or not, but the process can be “highly circumstantial and difficult to resolve,” says the CRC.
“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 CRC states on its website.
That challenge prompted Coinbase to reach out to others in the crypto industry to create the points-based rating system centered on a set of factual “yes or no” questions. Using the Howey Test to determine if the transactions qualify as “investment contracts,” the questions look at four factors: (1) whether crypto purchasers invested money, (2) in a “common enterprise,” (3) with a reasonable expectation of profit, (4) based on the effort of others.
Some people are skeptical about the Crypto Ratings Council.
There's some skepticism surrounding the CRC and its role. Some people question the subjectivity of the CRC ratings. Others wonder if the ratings will end up the subject of lawsuits against the CRC.
“I can see litigants asking for the discovery of deliberative materials provided by outside counsel used to calculate the ratings,” Stephen Palley, blockchain and virtual currency attorney with Anderson Kill told Coindesk in 2019.