Cryptocurrency Giants Form Rating Council; Reaction

It has been revealed that a series of trading and investment giants in the cryptocurrency space, including Bittrex, Circle, Coinbase, Genesis, and Kraken, have banded together to create the Crypto Rating Council in order to better decide which digital assets can and cannot be traded on their platforms.

The CRC, it is hoped, will bring greater clarity to the vague characterization of cryptocurrencies by global regulators — allowing digital assets service providers to assess the digital assets and whether they may fall afoul of future regulation. The group is planning to review numerous digital assets in coming months, giving them a rating (of 1 to 5) drawing on SEC guidelines. The group may develop similar tools for non-U.S. jurisdictions soon.

Below is a range of expert commentary from leaders in the blockchain and cryptocurrency space about the matter; 

Alex Lam, Co-Founder and CEO of RockX,  a new digital asset services platform, said:

“I believe that the creation of the Crypto Rating Council is a positive move for the broader digital assets sector, establishing a sort of ‘expert panel’ to provide greater clarity on token nature. This clarity, throughout the history of the digital assets space, has been lacking—with efforts by both projects and regulators to demystify the characterisation of cryptocurrencies and tokens for consumers often proving unproductive.

While the creation of such a body was well overdue, it is safe to assume that these actors have been prompted to take action in the face of a strict, yet undeniably vague, regulatory environment in the US towards digital assets. It remains to be seen how their efforts are going to be received by the SEC and similar bodies. As these efforts can certainly be expanded beyond the US, international regulators are sure to be taking note of those involved as well as their overarching objectives.

While the initiative of the CRC founders will likely encourage more self-initiated and self-regulated efforts to help the crypto industry mature, it should not be viewed as a perfect association or ‘end product’ in itself. The CRC itself is made up of a narrow subsection host of the industry. Due to the nature of the founding bodies, there may be a number of challenges to the Council’s long term success.

In particular the potential conflict of economic interests between the exchanges involved, as well as the projects analysed, may raise the question of how, and for how long, can this institution achieve its objectives. In the longer term, the CRC will also need to incorporate a much broader array of industry actors to draw on the full gamut of knowledge within the cryptocurrency ecosystem. I hope to see the eventual panel being more inclusive and representative of the global digital assets market as a whole.”

Tom Maxon, Head of US Operations at CoolBitX, a blockchain security company, said:

“This move by the industry is undoubtedly a good one. If the industry can define tokens and coins via the Crypto Rating Council (CRC), it will not only help regulators more acutely define the nature of certain digital assets, it will also help companies within the space to understand themselves and their product offerings. 

Throughout American history, private industry and government have worked together to develop strong frameworks which have laid the foundations of world-defining industries. For example, during the biotech boom of the 80s, the Reagan Administration convened a working group that brought together companies, scientists, policymakers, and regulators. They developed the Coordinated Framework for Regulation of Biotechnology, where seeds were regulated by USDA, animal feed by the FDA, and biological protection by the EPA. They took different aspects of this emerging technology and had them regulated by the correct agency.

This greatly enhanced the stable growth of biotech first in the US, then fostered this worldwide into what is known as the Green Revolution. A very similar thing happened with the internet in the US during the 90s. It was not perfect, but it certainly helped drive solid frameworks for mass adoption. 

The same could happen to cryptocurrency if the CRC taxonomy is able to resonate with regulators. Perhaps we will see a future where stable coins are regulated under Treasury, bitcoin as retail-driven digital gold under the FTC, security tokens under the SEC, and custody with FINRA. Still much work must be done; the industry needs to move past intense, polarizing infighting, and government agencies need to take this technology seriously. But it all begins in the industry and regulators buying into a standard taxonomy. Maybe in the near future, the term “cryptocurrency” will not be used as a catchall term for all digital assets. Instead this technology could seamlessly naturalize itself into the fabric of everyday economics, finance, or currency. 

Carylyne Chan, Chief Strategy Officer of CoinMarketCap, the world's most viewed cryptocurrency price-tracking website:

“At CoinMarketCap, we believe in information transparency with the aim to create a frictionless market. More dependable information given to the public means that users can take a deeper look and make decisions based on their own informed conclusions. The new Cryptocurrency Rating Council is a great first step towards simplifying what is deemed a confusing aspect of the cryptocurrency market — whether or not the SEC views certain cryptoassets as securities or not.

However, before the CRC’s rating system can be fully adopted as industry standard, it must be viewed as consistent with general industry views and observations. As it currently stands, the ratings of some of the cryptoassets seems to conflict with the stance of some of the Crypto Rating Council members themselves. It might be difficult for regulators to review any cryptoassets using this framework until the CRC ratings can prove that the methodology is robust and stands up to scrutiny.”

Sky Guo, CEO and Co-Founder of Cypherium, the enterprise-focused blockchain platform that prioritizes scalability and decentralization

“We hope that the newly announced Cryptocurrency Rating Council is welcomed warmly by the cryptocurrency community. We long argued for the opportunity to self-regulate, within the bounds of reasonable governmental cooperation and standards, and the formation of this new council seems as good a chance as any to prove that our community is a professional community and that our industry can live up to the standards of our technology. 

In the beginning, these ratings may not carry very much legal weight, perhaps, but they will inform how the cryptocurrency community might meaningfully utilize a rating system. In other words, one of the major value propositions outside of "legitimizing" certain digital assets will be a classification system that helps users within the DLT ecosystem navigate our space. One might consider this rating system more akin to the ESRB than S&P Global, at least in the beginning. This would be to the great benefit of our community, certainly, as it would help individual enthusiasts, as well as institutional actors, focus their time and energy on projects that suit their needs. 

There does exist the danger of centralization, even among cryptocurrency exchanges, which amounts to the greatest danger facing the technology itself. If this council were able to accrue such influence as to affect price or utility of particular networks, beyond the control and consent of its users, then its utility would be undercut severely. Nevertheless, it is a risk worth taking, and should be taken by the most trusted players in the American crypto space.”

Fran Strajnar, CEO and Founder of Brave New Coin, a leading provider of high-value cryptocurrency market data.

"Robust guidance and expertise on whether individual digital tokens can be characterized as securities, commodities, currencies, or something in between is sorely needed for our industry. The lack of clarity around the methods used by entities such as Fincen or the SEC to classify tokens is frustrating. It creates uncertainty around how individual token holdings may be taxed, the legal rights a token holder has against an issuing ‘foundation’, and the potential fines a token issuing foundation may receive for not adhering to SEC guidelines. 

The CRC has come under immediate scrutiny from the digital token investment community. All founding members are giants within the cryptocurrency space. Their market expertise and granular legal understanding of the position that digital tokens take under securities law is greatly appreciated, however, they all likely benefit from most assets falling under the ‘not security’ classification. The initial ratings made by the CRC have already been perceived as being too favourable. How aligned the ratings agency is with the likely more aggressive perspectives of regulators in agencies like the SEC is unclear. It would be encouraging to see non-industry players such as international law firms, banks and traditional financial institutions join the ratings council. This would provide a more objective and grounded perspective on how regulators might challenge and approach the cryptocurrency asset space. 

‘A best of all worlds’ approach where views from a wide range of stakeholders is reflected in ratings services is possible. Open discussion from all perspectives on important topics such as asset classification is critical for the long term health of the industry.”

Florian Glatz, Co-Founder of Fundament, an end-to-end security issuance solution for asset tokenization based in Germany, and the first company to receive approval from the German Financial Market Authority BaFin for a €250m blockchain-based real estate bond.

“From a European perspective the CRC shows just how badly-suited the U.S. securities regulation is for fintech in general and cryptocurrency assets in particular. Without a clear law and clear definitions of things such as "what is a transferable security" innovation in the market is ultimately stifled. For this reason we believe that Europe will lead the next token revolution, which is all about bringing regulated instruments onto public blockchain networks.

At Fundament we help asset managers issue securities regulated under the European MiFID II framework: a law that gives us a very clear, non-esoteric definition of a transferable security. We don't have to look at things like degree of decentralization, and other impossible-to-measure factors which honestly should not be a factor when assessing whether something is a security or not.”

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