Major crypto exchanges in the US have come together in order to decide whether an ICO is a security or not. And the most interesting fact is that this was not done in response to a court ruling or due to some directive by the SEC forcing them to do so. This is exactly what makes the move an interesting one, a voluntary action. The move, for the most part, is positive. It gives investors and buyers of tokens more information in a condensed manner to make a proper decision. But it leaves many questions unanswered.
The founding members of the council include Coinbase, Kraken, Circle, Bittrex, and Grayscale. The council evaluation of coins is a point-based system with the score reflecting the confidence they have that given crypto is a security or not. The analytical framework is based on relevant laws and statements from the SEC staff relating to digital assets, including the SEC’s “Framework for Investment Contract of Digital Assets”. This is what those scores mean: A score of 1 means the Council’s analysis found that an asset has few or no characteristics consistent with treatment as security. A score of 5 means the Council’s analysis found that an asset has many characteristics strongly consistent with treatment as security. And finally, scores in between reflect the relative strength and presence of characteristics relevant to the Council’s framework. The main motivation of the rating is to make the process of analyzing a token easier because such an analysis is difficult and expensive to operationalize consistently, may involve judgment calls, and can lead to disagreement even among legal experts.
These exchanges have no experience in such matters and more than that even the SEC is not sure how to deal with ICOs. Even though the SEC has recently released the ‘Framework for “Investment Contract” Analysis of Digital Assets’, it is vague and opens room for broad interpretation. Another concern is the conflict of interest as it leaves room for the crypto exchanges to decide whether an ICO is a security or not. Without proper oversight, such a power can be misused in a number of ways. Another issue is the validity of these rating as in the FAQ section of CRC it is written, “The framework is the Council’s attempt to provide a consistent analysis which the members find useful but it is not legal advice and does not reflect the opinion of any member or outside counsel of whether any given asset is a security”.
The whole thing seems like a huge waste of time given that the ratings don’t mean much, even from the standpoint of the council. But it is a clever way of making sure that the exchanges are not caught in the middle of crossfire between SEC and any one of these coins, and even though the council has made it clear that their rating is ”not legal advice and does not reflect the opinion of any member”, it doesn’t prevent those members from acting on those ratings. There have been a lot of talks about self-regulation for a long time in the crypto world, and this seems like the best example where stakeholders come together to bring a structure. Unfortunately what this means for crypto enthusiasts is that it will not be the anarchist world they dreamt of. As they say “order from chaos” seems to be a fit for this situation.
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