18 August 2020
In the United States, there is a consortium of leading crypto businesses that is focused on the maturation and growth of cryptocurrency markets, trading services, and financial infrastructure. This consortium, known as the Crypto Rating Council, believe that compliance tools can practically help the cryptocurrency services, custodians, trading exchanges, and investment firms to provide support for the adoption of digital currency class and blockchain-related technologies. The council doesn’t express or address the advantages of digital assets for sale, purchase, or for any other business. Furthermore, the body is not licensed by any federal authority or registered by the U.S Securities and Exchange Commission.
What is the Purpose of CRC?
The CRC is formed to create a standard framework that can be used to objectively assessment whether any crypto asset can be classified as a security under U.S federal securities laws.
Most importantly, it has to decide whether the digital asset is opposing a currency or a commodity. For legal cryptocurrency financial services, the firms or individuals need to have registration and licenses. All transactions are not addressed by the council specifically but if the transaction offers sale security then it must be registered under the applicable legal laws.
SEC has released guidance to alert the industry regarding the cryptocurrency legal issues and to resolve the cryptocurrency’s security-relevant issues. The framework would help to apply laws efficiently and consistently to the digital assets. The complexities in the field have led to redundant inconsistencies in the analysis of financial services which has slowed down the new cryptocurrency launches in the U.S.
The Council Members
Within the Crypto Rating Council, there are a number of leading organizations that have been moving the blockchain and cryptocurrency space forward for a number of years:
- DRW Cumberland
- Grayscale Investments
The council publishes ratings after proper factual analysis done by technical and legal experts. The legal experts under the council’s member firms use the standard framework for rating the assets particularly. Over time the council is looking forward to welcoming more companies to join the body.
The Rating Framework
The CRC core is a rating framework where the rating system is based upon the factual points raised to assess each specific element for the legal tests. An investigation is done as per the court laws regarding the investment contracts. The emphasis is that the contract objective and driven facts that can be implemented to respond to different digital asset-related issues consistently over time.
The scoring for each asset is done in between the range of 1 and 5. Score 1, means analysis considers the asset not having consistent characteristics for a centralized development therefore it can’t be considered as a security. Score 5, means analysis recommends the asset has abundant characteristics and can strongly claim as security. CRC can publish scores to strengthen understanding, common dialogue, and vocabulary of federal securities laws but scores are obviously not to address the suitability or merits of digital assets.
SEC’s Howey Test
The U.S. Supreme Court considered factors to test whether an investment represents security. A digital asset can be considered as security if:
- Investment should be in the form of a common enterprise.
- The enterprise is expected to generate some profits.
- Efforts are responsible primarily for profit generation.
The CRC is designed to provide guidance, according to which digital assets can be considered as securities. The evaluation is done through “yes or no” or fact-based questioning tenure. The council is not endorsed by any government legal agencies like CFTC or SEC. The ratings are not done to represent legal regulations and the council is specially built to help industrial participants dealing with cryptocurrencies.
In the near future, the council is expected to add a few more members, analyze more assets, and publish rating and revised scores for more assets. The council is growing continuously by developing similar reviewing mechanisms for non-jurisdiction bodies in the United States.