By Landon Manning
Several of the cryptocurrency space’s most prominent exchanges have banded together to form the Crypto Rating Council (CRC), a body designed to rate crypto assets on their likelihood of qualifying as securities.
The CRC went live on September 30, 2019, with a variety of exchanges, custody services and other cryptocurrency businesses — including Coinbase, Kraken, Genesis, Bittrex and several others — behind it. Rating crypto assets on a scale of 1 to 5, with a 5 rating meaning they are the most likely to be considered a security, the CRC has published a guide as to where some of the most popular cryptocurrencies fall. Bitcoin, it claims, is a 1 on this scale, while Maker’s MKR comes in at a 4.5.
The main basis for these rankings is something called the Howey Test, based on the 1946 Supreme Court of the United States ruling for U.S. Securities and Exchange Commission (SEC) v. W. J. Howey Co. This was the first time that the Supreme Court declared that all sorts of goods or services could be considered “investment contracts” and thus held to the exact same standards as more traditional securities. Some of the criteria for this ruling involved the presence of an ongoing relationship between the seller of the product and an implicit expectation that the buyer’s purchase will include further financial payouts in the future.
Considering that bitcoin is a completely decentralized cryptocurrency with no “seller” and no one directly convincing purchasers that they can guarantee an increased valuation, the 1 ranking from the CRC makes sense.
The Howey Test may seem somewhat nebulous or outdated to many in the cryptocurrency space, but the SEC has claimed since 2016 that it is the most applicable measure for whether or not a crypto asset will be considered a security. Nevertheless, the CRC is trying to work both within and beyond this initial paradigm.
“The SEC has provided guidance to help participants in the digital asset industry evaluate the status of digital assets under the U.S. federal securities laws, but evaluating digital assets remains an important challenge and uncertainty for the industry,” Eric Sibbitt, chair of O’Melveny & Myers’ financial technology practice, the legal counsel for the CRC, told Bitcoin Magazine.
The ratings system that the CRC is currently employing is an attempt to combine both the existing regulatory framework of SEC v. Howey with the substantial cumulative experience of all of the firms involved.
Ideally, even if the SEC itself does not completely agree with the CRC’s assessment of various crypto assets’ statuses, the fact that all of these diverse companies are making a good-faith effort to work within the regulatory framework could help build a partnership between the CRC and official U.S. financial regulators. With a concrete, well-considered formula, the work that the CRC is doing could become a major factor in official cryptocurrency securities rulings in the near future.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.