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Coinbase-Led Group Aims to Help Crypto Firms Avoid Securities Violations
Coinbase, Circle, Genesis and more are developing a ratings system aimed to flag crypto assets that are similar to securities.
Updated Sep 13, 2021, 11:30 a.m. Published Sep 30, 2019, 1:05 p.m.
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Crypto industry leaders are taking the initiative to help firms in the space avoid running afoul of securities rules.
In a company blog post, Coinbase announced it has co-founded the Crypto Rating Council, a member organization purposed with assisting cryptocurrency companies determine if they comply with current U.S. federal securities law.
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Coinbase is joined at launch by seven other firms: Anchorage, Bittrex, Circle, DRW Cumberland, Genesis, Grayscale Investments and Kraken.
As part of the effort, the council will issue a 1–5 rating for a given cryptocurrency or token's similarity to a security. Under the rating system, a 1 constitutes a crypto asset with few functional similarities to a security, while a 5 would be consistent with the definition of a security.
As of now, the council has rated 20 crypto assets, with the top cryptocurrency by market cap, bitcoin, rated a 1. Notably, XRP, and polymath (POLY) landed scores of 4 or 4.5.
The Crypto Rating Council says the rating system – which it stresses is not investment advice – is based on past SEC guidance and case law, and the legal and technical experience of the firms making up the group.
'Complex' rules
The Blockchain Association's Kristin Smith told CoinDesk that Coinbase originally spearheaded the initiative.
“[It's] an effort by the industry to comply with the incredibly complex [U.S.] securities laws,” Smith said.
For now, only tokens listed by exchanges participating in the council have been rated and released, with more to follow. Assets that receive a 5 may never be disclosed by the Council, Smith told CoinDesk. All assets' assessments are liable to change, Coinbase's blog cautioned.
Coinbase Chief Legal Officer Brian Brooks later clarified to CoinDeks that the Council would not disclose 5 ratings – since member exchanges would not service these assets.
"Since a 5 rating indicates that the asset can only be listed on a registered securities exchange or ATS, by definition those ratings wouldn't be published because the relevant assets aren't listed by any member," Brooks told CoinDesk.
If council members later get approved to operate ATS platforms by regulators like FINRA, that may change, he added.
However, CEO of the Binance exchange, Changpeng "CZ" Zhao, was skeptical of the new ratings system, saying on Twitter:
The guys who score above 2 should form their own counsel and re-rate everything again.
— CZ Binance (@cz_binance) September 30, 2019
The council’s formation comes on the heels of payment network Ripple’s motion to dismiss a lawsuit of its XRP cryptocurrency. Ripple said in its filing that XRP is not a security, though this was not a core argument in its motion to dismiss.
Coinbase CEO Brian Armstrong image via CoinDesk archives
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