Rick: "You wanted to be safe from the government, so you became a stupid government. That makes every Rick here less Rick than me."
--Rick and Morty, Close Rick-counters of the Rick Kind
Today, a list of industry heavy-weights announced that they formed a new consortium called the Crypto Rating Council. The founding class of the Council consists mostly of large U.S. exchanges and OTC desks, such as Coinbase, Bittrex, Circle, Cumberland, etc.
The mission of the group is to rate on a scale of 1-to-5, how likely a cryptocurrency is a traditional security. The Council will hire outside legal experts to perform a legal analysis, using a point-based rating framework that the Council developed, and the internal counsels will then vote if they agree with this rating or not. Note that although the methodology is based on the Howey Test, this process is developed independently of SEC or CFTC, which means even if your project gets a glamorous 1 (least likely to be a security), there is still a chance you get nailed by regulators. There are many unanswered questions about this effort. First of all, why?
From the SEC's perspective, a financial instrument is either a security or not. There is nothing in the middle. So far, regulators haven't made any definitive statements that a cryptocurrency is not a security, and only went after projects that clearly are securities. The analysis of whether a coin is a security is complicated and highly nuanced. As Coinbase states in the blog post, "may involve judgment calls, and can lead to disagreement among legal experts (and even government officials)." Performing securities analysis in such a semi-open and collective fashion essentially distributes the costs and legal risks among all members of the organization.
Coincidentally, the SEC dropped the hammer today in a press release that they settled charges against Block.One, the company behind the notorious $4 billion EOS ICO, for an unregistered securities sale.
What does the Council have to say about this? EOS, the 7th largest crypto project in terms of market cap, has a 3.75 rating on the website.
What is the conditional probability that a coin is a security, given that SEC announced that it is a security? Well, it is not 75%.
But guess what, at the end of the day, the Council merely provides a hypothetical rating, it is your call to act on it. When the SEC subpoenas you for brokering a coin that's rated 3.75, the Council is not responsible for your silly judgment. So what should the casinos, excuse me, exchanges consider when listing a new coin? Should they be good citizens and wait for clear written approval from the SEC that something is not security? Or take their chances on the 3s to collect as many fees as possible?
"Sir, we are a small family-owned exchange, we don't get much traffic here. A coin that's only 70% likely to be a security is pretty good for us!"
Exchanges and OTC desks feed on trading volume. Due to stricter regulatory scrutiny, U.S. based operators are much more constrained in listing new pairs compared to their competitors overseas. Now, these exchanges are facing the even greater threat of Binance, the carnival of shitcoins, boarding the U.S. to fill-in its USD-BTC gap. The potential erosion of market share needs to be compensated from somewhere else. Listing a cohort of overhyped, venture-backed new projects seems like an obvious choice to pump excitement. However, every generation of shiny esoteric projects will be replaced by even fancier and more esoteric projects. But this doesn't matter for the casino. The house doesn't care what games you are playing as long as the house keeps making money. The game of new listings is too much fun to end. That's why the exchanges will keep supporting new coins that don't even have mainnets yet. That's why they will do anything to justify the listing.
Introducing the Crypto Rating Council (Coinbase)
"Coinbase is proud to join leading crypto businesses in announcing the creation of the Crypto Rating Council, a member-operated organization formed to assist market participants that trade or support crypto assets to comply with U.S. federal securities laws. Founding members of the Council are Anchorage, Bittrex, Circle, Coinbase, DRW Cumberland, Genesis, Grayscale Investments and Kraken."
"Now, investors are once again being forced to look farther afield for income and returns. In some cases, that requires them to face the unpleasant prospect of taking more risk or lowering their longer-term expectations."
Neither, and New: Lessons from Uber and Vision Fund (Stratechery)
"The problem, though, is Vision Fund may have confused 'big capital needs' with 'big opportunity'. What is striking about the firm’s portfolio is the paucity of 'tech companies'. Almost everything falls in the 'Neither and New' category defined by Uber: entire categories like real estate and logistics are defined by their interaction with the physical world, almost everything in the consumer category uses technology to enable real-world services, and the other major category, fintech, by definition needs huge amounts of capital. Most of these companies may have income statements that seem attractive in isolation, but when viewed from a total revenue perspective in fact have extremely low gross margins (relative to tech companies) and very high marginal costs."
"In the system set up by Silicon Valley and reinforced by its most powerful investors, Neumann and WeWork were the ultimate synergy, mysteriously increasing each other’s value. Neumann set the vision, collected the checks, preached the gospel. He went to great lengths to arrange things—power, money, connections—in his own favor. And why wouldn’t he? There were no barriers to his behavior, or interest in setting them up. So long as the company grew and its valuation rose, he was winning."