Eight major crypto players, led by Coinbase, have formed a framework that is intended to give market participants guidance as to whether any crypto asset is more or less likely to be classified as a security.
Dubbed the ‘Crypto Rating Council (CRC),’ the initiative marks an expansion of self-scrutiny of crypto companies involved with digital coins or tokens that have characteristics that make it fall under the US federal securities laws.
In addition to five major crypto exchanges – Coinbase, Bittrex, Circle, Genesis, and Kraken - founding members of the CRC council include digital asset custodian Anchorage, DRW Cumberland, and Grayscale Investments.
“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,” they said in a statement.
Howey tests
More specifically, the CRC will publish a simple rating for assets it reviews to indicate the results of its analysis as a reference for operators and the public. The process involves a points-based weighting that scales into a rating between 1 and 5.
For example, a score of 5 means the asset appears to have many securities characteristics as defined by the federal laws. In this case, the operator should consider registering with the SEC as a broker dealer or securities Exchange , or seek exemption from registration. The statement also provides a summary of the circumstances under which the digital asset is less likely to meet the Howey test.
Coinbase explains that they shared their methodology with the SEC and “other interested regulators and government officials.” However, neither the SEC, CFTC or any other regulator has endorsed the methodology or its resulted ratings.
Current views on whether an asset is a security tend to follow the “Howey Test,” which determines if an asset is considered a security depending on three elements. Firstly, the investment product can be exchanged for value. Secondly, the investment involves some element of risk, and thirdly, it must be tradable.
