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They have set up a Crypto Rating Council (CRC) and intend to publish ratings on ICOs on a 1 to 5 scale - 1 signifying a ‘Utility token’ has few or no characteristics consistent with a traditional regulated security i.e. Bitcoin A rating of 5, the CRC suggests that the token has many characteristics potentially of a security.

Mary Beth Buchanan, Kraken’s general counsel, was quoted in the WSJ as saying, “It does show the SEC what each exchange is doing to come to a decision.” However, the Crypto Council’s Frequently Asked Questions recent release stated, “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.”

Interestingly, the CRC has determined that XRP from Ripple (which is trying to compete with SWIFT) and which has always argued that it is a utility token, has been given a rating of 4. So, will this encourage regulators, in particular, the SEC, to look again at Ripple, on the basis that it is indeed a security token, and which potentially may have raised capital and not meet SEC regulations? After all, Ripple has been served a class action alleging that it has sold hundreds of $ millions of tokens without complying with the SEC security regulations.

At least the CRC is attempting to offer guidance and, no doubt, others will look to amend and try and improve on offering different guidance. This has to be welcomed, as opposed to ignoring this issue and waiting for the SEC to knock on their door which is the tact some organisations have currently taken.

Block.one is the creator of EOS, which has issued over $4.1 billion of tokens, making it the largest ICO ever. Being fined $24 million (only 0.0058%) to get an SEC waiver looks like a stunning deal for Block.one, so it is of no surprise that within hours of this announcement EOS’s token price was up by 9%.

“Block.one did not provide ICO investors with the information they were entitled to as participants in a security offering,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “The SEC remains committed to bringing enforcement cases when investors are deprived of material information, they need to make informed investment decisions.” 

As an aside, Block.one (according to a Bloomberg report in June 2018) was holding most of its current $2.2 billion in US Government bonds and 140,000 Bitcoins.

From this information, if you assume Bitcoin price is $8,200 then Block.one’s holdings are worth $1.19 billion which, added to the $2.2 billion of US bonds, ought to imply that EOS capitalisation ought to be at least $3.35 billion and not $2.9 Billion. No wonder Block.one was reported to be looking to buy back its stock. If Block.one did manage to buy back all the EOS tokens, then presumably Block.one’s ordinary shareholders could turn Block.one into a $450 million ‘cash shell’.

Given this Block.one ruling and the on-going battle that the SEC is having with Kik’s ICO, (a Canadian-based social message company), it is clear evidence that the SEC does indeed have teeth and is looking to pursue those ICOs which have broken US laws. Indeed, the SEC has just fined another company, Nebulous Inc, as it too is claimed to have violated SEC security regulations back in 2014. Interestingly, this shows that the SEC can take years to decide the action it wishes to pursue which is cold comfort for those organisations that carried out ICOs in the past.

Deloitte summarises that a custodian’s role is “to safeguard assets” and therefore it is only natural, as banks and asset managers look to invest in Cryptocurrencies and Digital assets, that custody services are being sought.

There is a selection of companies offering custody services such as Bitgo, Coinbase, Digital Asset Custody Company, Gemini, itBit, Kingdom Trust and Xapo. However, these companies are largely unknown by many traditional asset managers. Goldman Sachs and Fidelity are now offering custody services too, but what we are beginning to see are new custody service providers with well-known backers. Most importantly, they have the added protection of having the assets that they look after insured.

Anchorage, having received backing from the legendary Silicon Valley investment firm Andreessen Horowitz, has been offering insurance on all assets that it holds as a custodian. Anchorage has used insurance broker Aon to arrange its insurance cover.  Knox, in which Fidelity invested in 2018, is also offering full insurance on any Digital Assets that it provides custody services for. Knox is based in Canada and has arranged its insurance cover via insurance broker Marsh McLennan. Jennifer Hustwitt, a senior vice president at Marsh, recently commented that “Over the past six months, we have seen a net expansion of insurance capacity as the technology continues to mature and regulatory frameworks emerge.”

The provision of fully insured custodian services will prove to be extremely important if more asset managers are to have greater involvement in Digital Assets.