17.01.2021

Coinbase-Led Group Aims to Help Crypto Firms Avoid Securities Violations

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.

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.

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, maker (MKR) and polymath (POLY) landed scores of 4 or 4.5.

‘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.

Contacting CoinDesk after publishing, Coinbase’s Chief Legal Officer Brian Brooks said the Council would not disclose 5 ratings as 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,” said Brooks.

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 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.

CoinShares to Lobby Against UK Ban on Crypto Exchange-Traded Notes

Investment platform CoinShares is urging its customers to lobby the UK’s Financial Conduct Authority (FCA) over impending cryptoasset regulations.

In a letter to investors sent today, CoinShares has asked its customers to write emails and text messages to the UK regulator in support of one of its premiere products, exchange-traded notes (ETNs), which would be banned under the proposed regulation for retail investors.

As CoinShares writes:

“We believe that the FCA has not provided sufficient evidence to justify the proposed ban. Through its consultation, the regulator makes little attempt to genuinely evidence its claims and instead ‘cherry picks’ data sets in order to illustrate its perception of cryptoassets, ETNs and the perceived harm the FCA believes these products cause.”

Similar to a bond, ETNs provide investors with returns based on a market benchmark such as the S&P 500. CoinShares offers exchange-traded products for bitcoin, ethereum, litecoin, and XRP.

Released this past July, the FCA consultation paper claimed that “retail consumers cannot reliably assess the value and risks of derivatives and exchange-traded products that reference certain cryptoassets.”

In today’s letter, CoinShares said the FCA’s analysis on cryptoassets “demonstrates a lack of understanding of their functionality, value and the motivations for why an investor might seek out such products.”

In a pre-formatted email CoinShares is asking investors to send to the regulator, the firm called the ban proposal “unwarranted” and “not been properly thought out or considered.”

CoinShares is asking customers – or any proponent of cryptoassets – to write to the FCA over the proposed ban before the Oct. 3 comment deadline.

After publication, CoinShares CSO Meltem Demirors told CoinDesk the FCA’s proposed ban could set back the entire industry–inside and outside the UK–and not just CoinShares.

“If the FCA is successful in pushing this proposed ban through, it will mean that UK retail investors who currently enjoy access to the crypto-ecosystem via our ETNs will see their access cut off; with presumably little recourse.  Additionally, the FCA has been clear in their consultation to note that they intend to work with other regulators to ensure the ban is not circumvented – so the potential contagion effect is very real even beyond the UK based on the FCA’s own words.”

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