Unpublished preliminary scores from Crypto Rating Council found Tron's TRX, Polkadot's DOT could face higher chance of being deemed securities

Quick Take

  • A preliminary assessment of three tokens – Tron’s TRX, Polkadot’s DOT and Nervos Network’s CKB – by the Crypto Rating Council dated April 16 found that they could face a higher chance of being deemed securities
  • Such assessments are not final and are subject to change prior to formal publication
  • In the case of Polkadot, the preliminary score was developed prior to the blockchain network’s mainnet launch
  • The Nervos team has been in discussions about reassessing the token since the CRC initially classified its CKB inflation distributions as a dividend

A preliminary assessment by the Crypto Rating Council (CRC) dated mid-April found that the tokens for Tron, Nervos and Polkadot could face a higher chance of being deemed securities. However, the scores have yet to be finalized and could differ once published.

The CRC is a membership group of industry leaders that examines the characteristics of cryptocurrencies and digital assets to assess their characteristics in the context of U.S. securities law. Asset ratings are based on a framework underpinned by the "Howey Test" and can change based on the fundamentals of a given asset.

Founded by Coinbase, Circle, Genesis Capital and other crypto exchanges and businesses, the CRC was launched late last year to establish a "scalable, points-based rating system" for assessing whether a token possesses the characteristics of a security. While it doesn't provide legal advice, it does hope to bring consistent clarity from leaders in the industry on how they're approaching securities law analysis based on guidance and statements from the Securities Exchange Commission (SEC) and courts, according to CRC member Juan Suarez. Tokens that it has rated include Bitcoin, Dai, MKR, Ethereum and XRP.

In a token rating list dated April 16 and obtained by The Block, Tron, Nervos and Polkadot were each assigned a score of 4.75 out of a possible five. According to CRC's rating framework, each coin or token is scored in a range between one and five. "A score of 1 means the Council's analysis suggests the asset has few or no characteristics consistent with treatment as an investment contract, and therefore not a security under the U.S. federal securities laws," the group's website explains. "A score of 5 means the Council’s analysis suggests that an asset has many characteristics strongly consistent with treatment as a security."

These are preliminary ratings that are subject to change and it's not clear if they will ever be published. Outside counsel tabulates a preliminary scorecard for a nominated asset by examining available information, like white papers, social media posts and GitHub repos, as well as reaching out to the project's development team to answer questions. CRC members then hold a live meeting with outside counsel to discuss the findings and raise any further questions. If there are no further discussions necessary, the council votes whether to accept and publish the scorecard.

It's not clear how far along in the process the obtained draft scores appeared. A preliminary score may be revised multiple times, depending on new information presented by the project or questions raised by the CRC. Yet the figures offer a window into a behind-the-doors process that affects how tokens are weighed by some of the major businesses in the industry. 

While there is certainly dialogue between those rating an asset and its development team on salient aspects of the asset that could affect scoring, the CRC maintained that potential ratings are considered confidential until and unless published. Additionally, it is the CRC's policy not to share a potential rating with a token team, or otherwise outside of the CRC, prior to review, deliberation and final voting by CRC members.

Such feedback could raise or decrease a rating, according to a person close to the situation. It is more likely that further information would lower a rating, according to the person. For instance, the preliminary rating's high score for Polkadot was formulated prior to its main-net launch. Governance and the degree to which a network is operational can impact an asset's score over time.

While the CRC does not comment on specific cases, Suarez said that the council may see assets go from one stage of evolution to the next throughout the rating process, which would cause the council to go back and update its analysis to accommodate the latest facts before a vote.

"Both of those things happen from time to time," he said. "That is, among other things, why we could see movement in a draft score before it is final."

However, it is the CRC's policy not to speak on specific cases, so it is unclear to what degree a mainnet launch like Polkadot's would impact scoring.

"The CRC does not comment on unpublished materials. All asset scores approved by the CRC for release are published to our website," a representative for the group previously told The Block.

Outside counsel is the main point of dialogue between a project and the CRC. Since last month, the Nervos team has been in dialogue with the CRC about the functions of the Nervos DAO. While the team maintained it did not know the exact draft score until The Block's inquiry, the Nervos team had been in discussions about reassessing the token since the CRC initially classified its CKB inflation distributions as a dividend. It has since provided the CRC with more information clarifying the role of these distributions, and Nervos maintains that its native ecosystem token CKB is a utility token rather than a security token. The rating is being reassessed and will be revised to reflect this new information, according to Nervos.

The CRC has not yet completed a final vote on the list of assets, and subsequently, the CRC website has not been updated to reflect final ratings for these assets. It is not clear when a final vote will be completed. Currently, the highest score on the website is a 4.0 for XRP, while Cosmos, Stellar, EOS are each rated as 3.75. 

Polkadot has yet to distribute its DOT token, which, according to the blockchain project's website, will be generated in mid-2020. It is not clear which exchanges will list the token once it is issued.

The widely-traded Tron is currently traded on one U.S.-based exchange, Kraken, in the form of a USD pair. Kraken is a member of the CRC, which in addition to the companies named above includes eToro, OKCoin, Radar, Anchorage, Bittrex and Cumberland.

Nervos is traded on several exchanges, including Bittrex, but it does not have a U.S. presence at this time.

Correction: This report has been updated to note that Kraken, a U.S.-based exchange, maintains a TRX/USD trading pair.

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