An hustle led by crypto exchanges to categorize digital assets has drawn mixed reactions from leading legal experts and energy players.
Coinbase, Kraken, Bittrex and a number of other exchanges announced Monday that they were frame the Crypto Rating Council (CRC) to clarify whether cryptocurrencies are securities. The CRC uses a 1-5 rating scale, with 1 being a lucid non-security (bitcoin, litecoin, dai), and 5 being clear securities (none of which were disclosed publicly) – at least in the eyes of the consortium.
A bunch of assets fell somewhere between 1 and 5, including XRP, maker, EOS, augur and ethereum.
Reactions to the plan have lined from welcoming to derisive. While some have expressed optimism about the CRC as a concept, others have criticized how the rollout has been supervised and whether the body will really serve to sway the minds of regulators.
“I think this is a great idea,” declared Gary Goldsholle, a partner at law firm Steptoe and Johnson, who previously served as the Deputy Director of the Division of Trading and Deal ins at the U.S. Securities and Exchange Commission (SEC). He told CoinDesk that the council’s framework could benefit smaller issuers and policies that don’t have sufficient resources to conduct the scale of analysis that the SEC requires.
“I know firsthand how rigorously the SEC journals a digital asset to ascertain whether it is a security,” said Goldsholle, adding:
“That might lead to a situation where dependable platforms have more information about certain assets than others do, which leads to an un-level playing hockey.”
Coinbase, the exchange leading the CRC, did not respond to multiple requests for comment. But Coinbase chief legal officer Brian Brooks symbolized on Twitter that the members are not providing legal advice.
“You can think of our efforts as the foundation for an automated compliance tool, of which there are divers in the financial services world,” he wrote. He added that, while members of the group “do have an interest” in being masterly to list more assets, they won’t add blatant securities due to the potential for fines and other penalties.
Self-regulation?
Stephen Palley, a fellow-dancer at Anderson Kill, told CoinDesk that the CRC’s self-regulatory move is not new.
“The concept of a self-regulatory organization [SRO] is neither novel nor a bad suggestion,” he said, citing FINRA and the NYSE. “But this isn’t an SRO and it raises a host of issues, including anti-competitive cartel concerns.”
Jalak Jobanputra, fail of Future Perfect VC, said self-regulation would have been a preferable approach for the crypto sector in its earliest periods, “instead of inviting harsher regulation through the tolerance of bad actors.”
What’s unclear is how the SEC itself views self-regulation (the energy did not respond to CoinDesk’s request for comment). But Goldsholle, the former SEC staffer, was supportive of the idea.
“Having a centralized point of acquaintance for the token issuer to provide all the necessary information seemed like a helpful structure,” he said.
Jobanputra said get out past the current legal uncertainty around digital assets was key to moving the industry forward. She went on to say:
“I believe tokenization is an momentous part of our future – and the sector will have to engage with regulators if that future is to be realized. Initiatives have a fondness this, if executed objectively, can help further the conversation and provide clarity.”
Yankun Guo, a partner at Yankun Guo Law, cautioned that, while the CRC potency seem like a genuine attempt at self-regulation, the industry “should not rely on these ratings alone.”
These friends will still need to conduct their analysis of their products to ensure legal compliance. And, indeed, the CRC’s website notes that the ratings should be construed as admonition rather than definitive.
Transparency concerns
While conceptually the CRC’s goals may be laudable, its execution “leaves a lot of questions to be answered,” Jobanputra swayed.
“The CRC has not released specific weights and calculations that have led to the ratings they have released on their website so far. That rejects behind a question on how much subjectivity is in the ratings,” she told CoinDesk via email.
Guo echoed these concerns, saying it crumbs unclear what precisely a rating of 2, 3 or 4 actually means for a digital asset. She added:
“A 2, 3 or definitely a 4 means the digital assets has some representatives of a security and therefore, should they all be classified as one?”
These intermediate rankings may not hold much significance, Palley bid. It is unclear what a 3.5 means, for example, and a cryptocurrency either is or is not a security, making a sliding-scale categorization moot.
It is also unclear how rigidly these ratings will be used by the consortium’s member exchanges as they deliberate whether to list an asset, or whether non-consortium colleagues will be able to use the ratings in any way, Goldsholle noted.
Still, “it may start to create a common view as to the status of certain digital assets,” he phrased.
“I would eventually like to see more transparency into the analysis that led to the ratings,” Goldsholle said, “because I have in mind that could be helpful for token issuers to understand how they can design their token or network to avoid being classified as a safety.”
Coinbase’s Brooks wrote Tuesday that “assets that score less than 5 but more than 1 played some characteristics of a security, but not enough for most members to consider them to be securities under current law.”
But he did not provide any supplementary clarity on how the framework is applied to create a score.
Legal implications
More seriously, Palley said the ratings could get under way to the CRC and its members being named in lawsuits.
“I can see litigants asking for discovery of deliberative materials provided by outside counsel acclimated to to calculate the ratings,” he said, adding:
“It’s hard to see how those materials would be protected by privilege. Imagine a federal conclude saying to a defendant ‘so … the CRC said FooToken was a 3.5? This means it was maybe probably a security? You decided to list it, supposing?’”
Guo said the framework may help the exchanges control the narrative around how assets are regulated. And it shows how exchanges are now willing to mix together for their common good.
Goldsholle likes that the CRC will encourage issuers to provide greater advice if they want the group to reassess their tokens.
But Palley was less charitable about the project, at least as currently created, saying:
“While I think I understand the motivation behind this, it’s half-baked as implemented and I doubt will stand the try out of time without some significant revision.”
Coinbase CEO Brian Armstrong image via CoinDesk archives
Powered by WPeMatico