The biggest players
Coinbase, Kraken, Poloniex, and Bittrex have developed a system for grading cryptocurrencies that challenges security regulations. The crypto exchanges want clarity on which coins have the same characteristics as shares, in regards to knowing where you have a stake that is expected to yield a return. The opposite of securities is utility coins, where the use of coins is decentralized and has a value in the chain, not primarily a return to those who own it.
The Securities and Exchange Commission (SEC) has hit hard on what they believe are hidden securities. There are cryptocurrency projects that have sold tokens to the public without registering sales with the SEC, nor have they met the requirements for documentation and sales restrictions related to the quality of investors.
Stock exchange law of the last century
The legislation that the SEC uses is from 1934 and was established after the stock market crash in 1929. Their purpose was to protect investors. Various protection mechanisms such as documentation requirements and licensing of the facilitator were established. Today, this has resulted in an increase in the cost of raising money from investors through regulated share sales. There have been discussions of a minimum cost of approximately 1 million dollar to satisfy all legal requirements of the SEC for capital acquisition. Many crypto projects have therefore wanted to remain unclassified as securities, in order to escape the SEC’s regulations.
The problem arises when regulated marketplaces have to list these cryptocurrencies because they also bear a responsibility not to trade securities without the necessary permits. The answer is, that the largest US crypto exchanges have united about the Crypto Ratings Council, where they found common variables to assess whether a cryptocurrency is a security or not. This is done on a scale of 1 to 5, where 5 is a security and 1 is ‘utility’.
Reclassification and fines
It is interesting to highlight EOS from Block.one, which got a score of 3.75 on the stock exchange ranking. The company entered a $25 million settlement with the SEC this week because they admitted to selling unregulated securities to US investors. If the SEC goes for EOS, which ranks at 3.75, it’s worth noting the other cryptocurrencies that are at the same value or higher. There we find Maker, Polymath, XRP, Augur, Decentraland, Loom, Stellar and Tezos.