By John Filar Atwood
Coinbase and seven other crypto businesses have joined forces to create a member-operated Crypto Rating Council designed to help market participants that trade or support crypto assets to comply with federal securities laws. The businesses, with the guidance of O’Melveny & Myers, have created a cryptocurrency rating system to assess whether a token can be characterized as a security under the law.
Whether a token is characterized as a security under federal laws impacts a crypto services company’s registration, licensing and operating obligations. According to a Coinbase posting, while the SEC has issued guidance on the issue, the determination of whether a specific crypto asset is a security is a fact-intensive analysis that is complicated, expensive and can lead to disagreements among legal experts. In order to make the determination more consistent and objective, the eight member organizations created the Crypto Rating Council and a points-based evaluation system.
Rating system. The Crypto Rating Council said that the rating system is built upon a set of factual questions that assess each element of the legal test to determine whether an asset is a security. The framework is derived from case law and SEC guidance, and emphasizes objective, repeatable, and fact-driven responses that can be answered more consistently across different assets and across the same asset over time.
The Council’s framework results in a score between 1 and 5. A score of 1 indicates that the analysis suggests the asset has few or no characteristics consistent with a traditional regulated security, while 5 suggests that an asset has many characteristics strongly consistent with treatment as a security. The Council believes that some ratings will change over time, and it invites additional information or clarifications from token issuers that may impact an asset’s rating.
Coinbase stated that all asset ratings published by the Council will result from a factual analysis performed by outside legal experts in conjunction with technical experts at member firms. Member firms will review the analysis and will vote on whether to adopt the rating.
Legal adviser. The founding members of the Crypto Rating Council were advised in the creation of the rating system by O’Melveny & Myers. The firm pointed out that the methodology and ratings have not been endorsed by the SEC or any other governmental authority and are not intended to supplant the responsibility of industry participants to make their own determinations before transacting in digital assets for any intended purpose.
O’Melveny noted that the Council arrives at an important juncture in the evolution of the crypto market, with Congress closely examining Facebook’s Libra cryptocurrency and with the owner of the NYSE recently announcing the launch of a Bitcoin futures market.
Founders. Founding members of the Crypto Rating Council are Anchorage, Bittrex, Circle, Coinbase, DRW Cumberland, Genesis, Grayscale Investments, and Kraken.