4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM RATED P FOR PUBLIC: LEARNING FROM DODD-FRANK AND CREDIT RATING AGENCIES TO PROPOSE A PUBLIC CRYPTOCURRENCY RATING PROVIDER IN THE UNITED STATES Parth Kalaria* Credit rating agencies have long played an important role in the economy of the United States. In response to the financial crisis of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced reforms to increase the transparency and accountability of credit rating agencies. With the rise of cryptocurrencies and the expansion of blockchain technology, established credit rating agencies are now considering offering ratings for cryptocurrencies, in the same way they rate traditional securities. Borrowing from the lessons learned from the experience of the 2008 financial crisis, this Note proposes that the United States government create a public agency to provide cryptocurrency ratings. The Note begins by providing background information on cryptocurrencies, blockchain technology, credit rating agencies, and the subprime mortgage crisis of 2008. Next, it discusses problems in the credit rating process that were not solved by Dodd-Frank—namely, the prevalence of fraud and conflicts of interest between rating agencies and issuers. The Note then proposes the public cryptocurrency rating agency solution and additional supplementary reforms that may be adopted to address these * J.D. Candidate 2021, Columbia Law School; B.B.A. 2018, The Uni- versity of Texas at Austin. I would like to thank Columbia Law School Pro- fessor Joshua Mitts and Columbia Business Law Review 2019–2020 Edito- rial Board Members Katy Berk, Jingxi Zhai, and Mackenzie Humble for their invaluable assistance and comments throughout the drafting pro- cess. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 657 unsolved problems. I. Introduction ...................................................................... 658 II. Background ..................................................................... 661 A. Cryptocurrency and Blockchain Background ....... 661 B. Credit Rating Agency Background ....................... 663 C. The Subprime Mortgage Crisis ............................. 666 1. Specific NRSRO Behavior Contributing to Crash .............................................................. 667 2. Dodd-Frank’s Credit Rating Agency Reform .. 667 D. Weiss Ratings Background ................................... 668 E. Morningstar Entering Cryptocurrency Rating Space ............................................................................. 670 III. Problems and Consequences ......................................... 670 A. Market Manipulation in the Cryptocurrency Space ............................................................................. 671 B. “Ratings Shopping” Creates a Conflict of Interest672 C. Social Media and Potential Rating Fraud Concerns ............................................................................. 673 D. Initial Coin Offering (“ICO”) Fraud Concerns ...... 674 E. Dodd-Frank Did Not Fix the Aforementioned Problems .............................................................. 675 IV. Proposed Solution – Creating a Public Agency to Provide Crypto Ratings ........................................................... 677 A. Justification for Proposed Solution ....................... 677 B. Learning from Credit Rating Agencies ................. 677 C. Operating Details of Proposed Public Agency ...... 679 V. Evaluating Potential Reforms to Supplement the Proposed Solution ...................................................... 679 A. Applying Dodd-Frank Credit Rating Reform to Cryptocurrency Rating Providers ....................... 680 B. SEC Reform Should Extend Beyond Current State to Help Small Rating Providers Compete ........... 681 C. Implementing Incentive-Based Compensation for Rating Agencies ................................................... 683 D. Proposing Additional Factors for Cryptocurrency Rating Providers to Consider .............................. 684 VI. Conclusion ...................................................................... 685 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 658 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 I. INTRODUCTION The notion of cryptocurrency (“crypto”) becoming main- stream in the United States would likely have once drawn skepticism from most individuals. Yet as we observe the rise of cryptocurrency and blockchain technology around the world, the possibility of cryptocurrency’s mainstream status and widespread use has become more accepted. The Crypto- currency Act of 2020 provides evidence of cryptocurrency’s mainstream potential, as U.S. lawmakers begin to concern themselves with the regulation of digital assets.1 Additionally, an increasing number of vendors have begun to accept crypto- currency as a valid form of payment,2 and some companies have even started to assign ratings to cryptocurrencies.3 This rating process attempts to determine what the “best” crypto- currencies are.4 One approach to rating cryptocurrency in- volves looking at specific factors to evaluate each token, such as their underlying technology, likelihood of adoption, associ- ated risk, and potential future reward.5 Common wisdom used to hold that secondary markets for cryptocurrency fundamentally differed from traditional capi- tal markets. Indeed, one commentator noted that “[t]he tradi- tional market-based antidotes—signaling, underwriter repu- tation, and accountant or credit-rating certification—simply 1 See Crypto-Currency Act of 2020, H.R. 6154, 116th Cong. (2020). See also Jason Brett, Congress Considers Federal Crypto Regulators in New Cryptocurrency Act of 2020, FORBES (Dec. 19, 2019), https://www.forbes.com/sites/jasonbrett/2019/12/19/congress-considers-fed- eral-crypto-regulators-in-new-cryptocurrency-act-of-2020/#1817bfd25fcd [https://perma.cc/B2F5-45FF]. 2 Anthony Cuthbertson, Bitcoin Now Accepted at Starbucks, Whole Foods and Dozens of Other Major Retailers, INDEP. (May 14, 2019), https://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin- stores-spend-where-starbucks-whole-foods-crypto-a8913366.html [https://perma.cc/FVU7-Q5D9]. 3 David Canellis, Weiss Ratings: EOS is the Best Cryptocurrency, Then Ripple, and THEN Bitcoin, TNW (Mar. 26, 2019), https://then- extweb.com/hardfork/2019/03/26/weiss-ratings-cryptocurrency-eos-ripple- bitcoin/ [https://perma.cc/U69M-SF78]. 4 Id. 5 Id. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 659 do not apply [to cryptocurrency markets] as there are no un- derwriters, analysts, credit rating agencies, or accountants in the crypto context.”6 This thought has slowly been disproven as established credit rating agencies have begun to enter the cryptocurrency rating space.7 The changing times offer a ripe opportunity to analyze cryptocurrencies in a similar manner to how one might ana- lyze securities traditionally rated by credit rating agencies. Much of the criticism surrounding cryptocurrency stems from the extreme volatility in many cryptocurrencies’ value.8 This volatility makes it difficult to analogize between cryptocurren- cies and more stable financial instruments that are commonly rated by credit rating agencies. Nevertheless, one theory pos- its: [I]t is possible that through ubiquity and standardiza- tion, the volatility of a virtual currency might be suf- ficiently moderated such that it comes to be seen as a sufficiently reliable store of value that can serve as collateral for repo transactions—the same unit of vir- tual currency can then be re-pledged (potentially ad infinitum), and in this way, become a systemically im- portant means of exchange amongst financial institu- tions.9 The possibility that cryptocurrencies will become more commonplace lends credence to the importance of cryptocur- rency ratings. 6 Shlomit Azgad-Tromer, Crypto Securities: On the Risks of Invest- ments in Blockchain-Based Assets and the Dilemmas of Securities Regula- tion, 68 AM. U. L. REV. 69, 85 (2018). 7 Michael del Castillo, Morningstar is Building a Blockchain Bridge to the $117 Trillion Debt Securities Industry, FORBES (Oct. 1, 2019), https://www.forbes.com/sites/michaeldelcastillo/2019/10/01/morningstar-is- building-a-blockchain-bridge-to-the-117-trillion-debt-securities-indus- try/#64ef05853612 [https://perma.cc/V4TN-68DS]. 8 Aatif Sulleyman, Bitcoin Latest: Cryptocurrency is Too Volatile to be Used as Money, Experts in Davos Warn, INDEP. (Jan. 26, 2018), https://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin- latest-price-too-volatile-money-currency-davos-2018-world-economic-fo- rum-invest-a8179541.html [https://perma.cc/5DQQ-ZJZJ]. 9 Hilary J. Allen, $=€=Bitcoin?, 76 MD. L. REV. 877, 919 (2017). 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 660 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 The relevance of cryptocurrency ratings may increase in the coming years, given that a reputable credit rating agency, Morningstar, recently announced that it will soon enter into the cryptocurrency rating space.10 As additional credit rating agencies follow Morningstar’s path, it is important to consider how lessons learned from credit rating agencies can be applied to cryptocurrency rating agencies. Drawing upon such les- sons—in particular from the credit rating agency reforms put into place by the Dodd-Frank Wall Street Reform and Con- sumer Protection Act (“Dodd-Frank”)11—this Note proposes that the U.S. government should create a public agency to pro- vide cryptocurrency ratings. As the use of cryptocurrencies becomes more prominent in the global economy, investors will need an accurate represen- tation of each cryptocurrency’s value. A rating can be both useful and dangerous because individuals rely on it as an in- dicator of a cryptocurrency’s value and legitimacy. Inaccurate signaling of a cryptocurrency’s worth may lead to significant problems, such as an investment bubble or market manipula- tion.12 This Note proceeds in six Parts. Part II offers relevant background information on cryptocurrency, blockchain tech- nology, credit rating agencies, the subprime mortgage crisis and rating agencies’ involvement, and the portions of Dodd- Frank relevant to credit rating agency reform. Given crypto- currency’s increasingly mainstream status, it is useful to anal- ogize between credit rating agencies and cryptocurrency rat- ing providers, especially as established credit rating agencies begin to provide ratings for cryptocurrencies. Part III of this Note explores the issues that plague traditional credit rating 10 See del Castillo, supra note 7. 11 Dodd-Frank Wall Street Reform and Consumer Protection (Dodd- Frank) Act, Pub. L. No. 111-203, § 932(a)(8), 124 Stat. 1375, 1877 (2010) (codified at 15 U.S.C. § 78 (2018)). 12 John M. Griffin & Amin Shams, Is Bitcoin Really Un-Tethered?, 75 J. FIN. (forthcoming Aug. 2020) (manuscript at 47), https://www.coindesk.com/wp-content/uploads/2019/11/SSRN- id3480263.pdf [https://perma.cc/8FL3-AEKG] (discussing the problems that arise when the public is led to believe that low-quality securities are invest- ment grade). 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 661 agencies, and how we might avoid such problems as credit agencies enter the cryptocurrency space. Part IV of this Note proposes the creation of a public cryptocurrency rating pro- vider to avoid (or at least, minimize) the impact of conflicts of interest that plagued credit rating agencies leading up to the housing crisis, and that, to a great extent, still exist today. Lastly, Part V of this Note discusses additional cryptocur- rency rating reforms that should be adopted to supplement the public agency proposal. These supplemental reforms should be considered regardless of whether Congress imple- ments the main public agency proposal. The nascent state of cryptocurrency regulation and governmental involvement in the cryptocurrency space makes the present an appropriate time to create a well-functioning and robust cryptocurrency rating landscape. Part VI concludes. II. BACKGROUND A. Cryptocurrency and Blockchain Background Before diving into the world of cryptocurrency ratings, a foundational understanding of cryptocurrency and blockchain technology is helpful. Many hear the terms Bitcoin, cryptocur- rency, and blockchain used frequently, but are unsure of their meaning. First, the simplest way to conceptualize a blockchain is to visualize a ledger, or record book. 13 This ledger is shared among parties in a network over which there exists no single central authority in control.14 Instead of having one central authority (such as a bank), all users on the network—called “nodes”—hold an identical copy of the ledger.15 Similar to a page from a record book, a “block” consists of transactions from the same time period, hence the term “blockchain.”16 13 OECD, OECD BLOCKCHAIN PRIMER 4 (2018), https://www.oecd.org/fi- nance/OECD-Blockchain-Primer.pdfhttps://www.oecd.org/finance/OECD- Blockchain-Primer.pdf [https://perma.cc/7AAT-V2XK]. 14 Id. at 4. 15 Id. 16 Id. https://www.oecd.org/finance/OECD-Blockchain-Primer.pdf https://www.oecd.org/finance/OECD-Blockchain-Primer.pdf 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 662 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 Thus, the ledger is comprised of a string of blocks, which clearly memorialize completed transactions for all network participants.17 Blockchain is distributed, immutable, and agreed to by consensus. 18 Blockchain is a distributed ledger, since it is not held or updated by a central authority, but rather is held and maintained by all nodes in a network. 19 This system is more difficult to attack for hackers and criminals, since there is not a central database that stores the ledger’s information. 20 Ad- ditionally, blockchain transactions are immutable, as they cannot be reversed once added to the ledger. 21 This feature again departs from traditional databases, where authorized users can modify data without detection by other users. 22 In the case of a blockchain, specific nodes in the network must approve changes to the ledger through a consensus mecha- nism, which outlines the rules behind such an approval pro- cess. 23 This process is key to maintaining the validity of each block in the blockchain. Blockchain’s characteristics make it a wonderful tool for recordkeeping; indeed, one of blockchain’s common applications involves recording balances of and transactions in “tokens.”24 Tokenization refers to the transferring of the rights to a real-world asset into a digital token on a blockchain. 25 This token can be traded and tracked digitally. 26 There are three main types of tokens: payment, utility, and security. 27 Pay- ment tokens, also referred to as cryptocurrencies, are a unit of measurement and store of value. 28 Utility tokens represent 17 Id. 18 Id. at 6. 19 Id. 20 Id. 21 Id. 22 Id. 23 Id. 24 Id. at 8. 25 Id. 26 Id. 27 Id. 28 Id. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 663 access to services or products provided by a company, similar to a gift card. 29 Security tokens represent an equity-like in- vestment in a company, similar to buying shares of a company on a stock exchange. 30 Token transactions differ from traditional financial trans- actions since banks play a critical role as intermediaries for traditional financial transactions. Unfortunately, banks typi- cally store their data on a central ledger, creating a target for hackers who may attack this single point of failure. 31 With this issue in mind, Bitcoin was created to allow users to trans- fer units of value without relying on banks as middlemen. 32 The lack of a central authority in control of a single ledger is the primary appeal behind Bitcoin, and certainly a large rea- son why many individuals advocate for cryptocurrency’s wide- spread use.33 After understanding the background behind cryptocur- rency, discussing the fundamentals of credit rating agencies makes it easier to explore and appreciate the nuances of rat- ing cryptocurrencies. Credit rating agencies provide ratings to certain types of securities to tell investors whether such secu- rities have a high or low default risk.34 These ratings play an important role in capital markets as they indicate to investors the value and safety of their investment. B. Credit Rating Agency Background Establishing a background knowledge on credit rating agencies facilitates the process of analogizing between crypto- currency ratings and credit ratings. Credit rating agencies are specialized organizations focused on assessing the credit risk of private and public companies that seek capital markets 29 Id. 30 Id. 31 Id. 32 Id. 33 Id. 34 Updated Investor Bulletin: The ABCs of Credit Ratings, SEC. & EX- CHANGE COMMISSION (Oct. 12, 2017), https://www.sec.gov/oiea/investor- alerts-and-bulletins/ib_creditratings [https://perma.cc/JY7L-WKL4]. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 664 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 financing.35 Credit rating agencies give low ratings to high- risk products and securities because the issuers are consid- ered to have a higher likelihood of default.36 Similarly, credit rating agencies give high ratings to low-risk products and se- curities because the issuers are fairly likely to stay solvent and meet their financial obligations.37 In short, in gauging is- suers’ ability to meet their financial obligations credit rating agencies work to predict the chance of a financial product be- ing repaid, in part or in whole.38 Credit rating agencies are considered “gatekeepers” for financial markets.39 Without of- fering investors quality assurance, it became hard for issuers to access capital markets, so they began paying for credit rat- ings, which essentially served as “seals of approval.”40 Nationally Recognized Statistical Rating Organizations (“NRSROs”) are credit rating agencies registered with the Se- curities and Exchange Commission (“the SEC”) under section 15E of the Exchange Act.41 As of January 15, 2020, there are nine credit rating agencies in the U.S. registered as NRS- ROs.42 As a result of the regulatory benefits of being desig- nated a NRSRO, these selected rating agencies have oligopo- listic control of the credit rating space.43 Specifically, the 35 Reyes Pariente, What Are Rating Agencies?, BBVA (May 4, 2017), https://www.bbva.com/en/what-are-rating-agencies/ [https://perma.cc/66SG-XTA5]. 36 Id. 37 Id. 38 EMILY MCCLINTOCK EKINS & MARK A. CALABRIA, CATO INST., REGULA- TION, MARKET STRUCTURE, AND ROLE OF THE CREDIT RATING AGENCIES 3 (2012), https://www.cato.org/publications/policy-analysis/regulation-mar- ket-structure-role-credit-rating-agencies [https://perma.cc/5PAQ-G2XR]. 39 Josh Wolfson & Corinne Crawford, Lessons from the Current Finan- cial Crisis: Should Credit Rating Agencies be Re-Structured?, 8 J. BUS. & ECON. RES. 85, 85–86 (2010). 40 Id. at 87. 41 15 U.S.C. § 78o-7 (2018). 42 SEC. & EXCH. COMM’N, ANNUAL REPORT ON NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS 2 (2020), https://www.sec.gov/files/2019-annual-report-on-nrsros.pdf [https://perma.cc/QY4B-9WYR]. 43 See EKINS & CALABRIA, supra note 38, at 19. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 665 demand for NRSRO ratings skyrocketed as specific kinds of investors were legally required to invest in securities rated highly by NRSROs.44 The importance of credit ratings com- bined with the small number of NRSROs give these specially designated rating agencies significant power through the rat- ings they offer. In this low competition environment, NRSROs are unlikely to improve their rating methodologies since they have little incentive to do so.45 This is consistent with the usual view of oligopolies as inefficient and unproductive since they lack an efficient market determination of prices.46 In the world of rating agencies, this inefficiency could lead to inaccu- rate ratings and methodological errors.47 Rating agencies began with the mission of providing trans- parency to investors, with Moody’s, the first public publisher of bond ratings, using an investor-pays business model in which firms sold bond ratings to investors.48 Later however, credit rating agencies switched to an issuer pays model in which the issuer pays the credit rating agency to rate its bond.49 This shift created the incentive for credit rating agen- cies to inflate ratings, as issuers could simply “shop” for higher ratings from other agencies.50 The issuer pays model still ex- ists today.51 44 See id. at 8. 45 See id. at 22. 46 Jack T. Gannon, Jr., Let’s Help the Credit Rating Agencies Get It Right: A Simple Way to Alleviate a Flawed Industry Model, 31 REV. BANKING & FIN. L. 1015, 1024 (2012). 47 Id. 48 LAWRENCE J. WHITE, MERCATUS CTR., A BRIEF HISTORY OF CREDIT RATING AGENCIES: HOW FINANCIAL REGULATION ENTRENCHED THIS INDUS- TRY’S ROLE IN THE SUBPRIME MORTGAGE DEBACLE OF 2007–2008 2 (2019), https://www.mercatus.org/publications/monetary-policy/brief-history- credit-rating-agencies-how-financial-regulation [https://perma.cc/23Z8- 4MA6]. 49 Id. 50 ALICE M. RIVLIN & JOHN B. SOROUSHIAN, BROOKINGS INST., CREDIT RATING AGENCY REFORM IS INCOMPLETE 2–3 (2017), https://www.brook- ings.edu/research/credit-rating-agency-reform-is-incomplete/ [https://perma.cc/U3XT-J2GK]. 51 Id. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 666 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 C. The Subprime Mortgage Crisis Overreliance on credit ratings likely played a significant role in the housing crisis of 2008.52 The involvement of credit rating agencies in the crisis can be understood through a chain of events: Without those ratings, the transactions could not, and would not, have happened. Without the ability to ob- tain high ratings . . . there would have been little ap- petite for overpriced lower-rated mortgage collateral. Without that appetite, there would have been little pressure leading to the proliferation of sub-prime mortgages, because those mortgages could not have been offloaded through ‘second-level’ securitizations. Without the proliferation of low quality mortgages, there would not have been a dramatic housing market rise and fall, with the attendant ripple effects.53 The motivation for comparing cryptocurrency ratings to credit ratings stems from the involvement of credit rating agencies in the subprime mortgage crisis. Hopefully, in fur- thering the understanding of the role credit rating agencies played in the subprime mortgage crisis, similar disasters will be averted in the future. Currently, while cryptocurrency is still in the process of be- coming mainstream, it does not yet have the level of wide- spread acceptance necessary to cause an economic crash like that caused by subprime mortgage backed securities in 2008. Nevertheless, credit rating agencies and other rating provid- ers entering the cryptocurrency space could have a potentially legitimizing effect, making cryptocurrency investments more common and the impact of a possible crash greater. 52 See Frank Partnoy, Overdependence on Credit Ratings Was a Pri- mary Cause of the Crisis, in THE PANIC OF 2008: CAUSES, CONSEQUENCES, AND IMPLICATIONS FOR REFORM 116, 116 (Lawrence E. Mitchell & Arthur E. Wilmarth, Jr., eds., 2010) (“A primary cause of the recent credit market tur- moil was overdependence on credit ratings and credit rating agencies.”). 53 Id. at 129. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 667 1. Specific NRSRO Behavior Contributing to Crash After understanding credit rating agencies’ general contri- butions to the housing crisis, one can better grasp the specific details of NRSROs’ actions. In the lead up to the 2008 crash, NRSROs did not correctly recognize the default risks of resi- dential mortgage backed securities (“RMBSs”) and credit de- fault obligations (“CDOs”) as a result of flaws in their rating models.54 Shockingly, the models were faulty because the NRSROs did not verify the value of the underlying assets backing the securities being rated.55 Ultimately, the NRSROs failed to provide accurate ratings because they were incentiv- ized to boost profits rather than determine risk.56 This moti- vation ties back to the aforementioned “ratings shopping.”57 2. Dodd-Frank’s Credit Rating Agency Reform Dodd-Frank was a pivotal piece of legislation focused on preventing a future disaster like the 2008 financial crisis.58 As part of its response to the crisis, Dodd-Frank imposed rules governing credit rating agencies, primarily focusing on in- creasing their transparency and accountability.59 Most notably, Dodd-Frank directed the SEC to create an Office of Credit Ratings.60 This office develops rules about 54 Jeanna Simeone, The Use of Credit Ratings for Mortgage-Backed Se- curities, 31 REV. BANKING & FIN. L. 102, 104–05 (2011). 55 Id. at 104–05. 56 Id. at 105. 57 Id. 58 Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010); see also Charles W. Murdock, The Dodd-Frank Wall Street Reform and Consumer Protection Act: What Caused the Financial Crisis and Will Dodd-Frank Pre- vent Future Crises?, 64 SMU L. REV. 1243, 1246 (2011). 59 Dodd-Frank Act § 932. See also CRAIG L. JOHNSON ET AL., THE IMPACT OF DODD-FRANK ON CREDIT RATINGS AND BOND YIELDS: THE MUNICIPAL SE- CURITIES’ CASE 3 (2018), https://www.brookings.edu/wp-content/up- loads/2018/04/Johnson-C.-et-al.pdf [https://perma.cc/5GSX-54PW]. 60 About the Office of Credit Ratings, SEC. & EXCHANGE COMMISSION (June 4, 2018), https://www.sec.gov/ocr/Article/ocr-about.html [https://perma.cc/69BW-UNWC]. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 668 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 agencies’ internal controls and penalizes credit rating agen- cies for poor performance.61 Poor performance may be indi- cated through a failure to consistently provide accurate rat- ings.62 Nationally recognized credit rating agencies now have to maintain an internal control system and report details about its system to the SEC annually.63 Going beyond external oversight, credit rating agencies must also publicly disclose their rating methodologies (and changes made to them) and their use of third parties in performing due diligence re- views.64 These requirements are powerless if they are not en- forced. Therefore, Dodd-Frank empowers the SEC to penalize credit rating agencies that fail to provide accurate ratings.65 D. Weiss Ratings Background A brief discussion of some cryptocurrency ratings players is valuable before discussing potential reforms to the crypto- currency rating space. Weiss Ratings (“Weiss”) is one promi- nent and representative player. Cryptocurrency ratings can be impactful: a recent ratings report from Weiss Ratings led a cryptocurrency called EOS to shoot up in price nearly twenty percent in just forty-eight hours.66 Since beginning operations in 1971, Weiss has distin- guished itself with its compensation model.67 While issuers pay for ratings from Moody’s, Standard & Poor’s (“S&P”), and 61 David S. Huntington, Summary of Dodd-Frank Financial Regula- tion Legislation, HARV. L. SCH. F. ON CORP. GOVERNANCE (July 7, 2010), https://corpgov.law.harvard.edu/2010/07/07/summary-of-dodd-frank-finan- cial-regulation-legislation/ [https://perma.cc/57XM-3VLD]. 62 Id. 63 Id. 64 Id. 65 Dodd-Frank Act, Pub. L. No. 111-203, § 933, 124 Stat. 1376, 1883 (2010). 66 Billy Bambrough, Ratings Bombshell Lifts EOS, Bitcoin, and Wider Crypto Market, FORBES (Mar. 28, 2019), https://www.forbes.com/sites/billy- bambrough/2019/03/28/ratings-bombshell-lifts-eos-bitcoin-and-wider- crypto-market/#7fa40d9c3780 [https://perma.cc/5DHD-F7VQ]. 67 See About, WEISS CRYPTO RATINGS, https://weisscrypto.com/en/about [https://perma.cc/FG3Q-PLXN] (last visited Mar. 8, 2020). 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 669 Fitch under an “issuer pays” model, investors, consumers, and other third parties pay for ratings from Weiss under an “in- vestor pays” model.68 With this compensation model, some be- lieve that Weiss is not susceptible to the conflicts of interest that plague other rating agencies since issuers are not paying for the ratings they are receiving.69 While Weiss started by offering ratings for traditional fi- nancial instruments like stocks, mutual funds, and exchange traded funds (“ETFs”), the company ventured into the crypto- currency space in 2018.70 Weiss provides a letter grade for each cryptocurrency,71 and instructs investors to interpret the grades as follows: A = excellent B = good C = fair D = weak E = very weak.72 A F grade is given to cryptocurrencies that have failed or are subject to credible fraud allegations.73 Weiss currently does not provide cryptocurrency credit ratings, which gives one traditional rating agency, Morningstar, an opportunity to enter the cryptocurrency rating space before existing credit rating agencies.74 68 Id. 69 Id. 70 Id. 71 Id. 72 Id. 73 Id. 74 Christopher Hamman, Morningstar Brings Blockchain into the $117 Trillion Debt Securities Market, COINSPEAKER (Dec. 12, 2019), https://www.coinspeaker.com/morningstar-debt-securities-blockchain/ [https://perma.cc/CWM9-7FBD]. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 670 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 E. Morningstar Entering Cryptocurrency Rating Space The venturing of credit rating agencies into the cryptocur- rency rating space is a result of the actions of Morningstar. An established credit rating agency, Morningstar intends to soon offer a range of cryptocurrency asset rating services.75 The company has seen massive success, generating over $1 billion in revenue in 2018, despite only being in the ratings market for a few years.76 For comparison, Fitch Ratings (the third largest credit rating agency) had $1.7 billion in revenue in 2018.77 Morningstar has decided to focus on rating debt securities in their foray into the cryptocurrency rating space.78 On their blockchain Morningstar will include the terms of their invest- ment contract and their credit rating for the security at is- sue.79 This service appears to be valuable for investors by making it easier for individuals to evaluate the quality of their investments.80 With a major credit rating agency entering the crypto space, reforms could begin to be imposed shortly, as “Morningstar is still not sure if the U.S. Securities and Ex- change Commission will ask them to ‘enhance’ their block- chain methodology.”81 III. PROBLEMS AND CONSEQUENCES As cryptocurrency becomes more commonplace, we next consider how to best avoid the problems created by credit rat- ing agencies leading up to the last economic crisis. In order to craft the best solutions and make the best recommendations, it helps to start with an analysis of the potential problems that 75 See del Castillo, supra note 7. 76 Id. 77 Id. 78 Id. 79 Id. 80 Id. 81 David Pan, Financial Services Giant Morningstar to Offer Ratings for Crypto Assets, COINDESK (Oct. 2, 2019), https://www.coindesk.com/finan- cial-services-giant-morningstar-to-offer-ratings-for-crypto-assets [https://perma.cc/G3U5-NAXE]. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 671 may be created by the behavior of cryptocurrency rating pro- viders, including market manipulation, initial coin offering (“ICO”) fraud, conflicts of interest between issuers and receiv- ers of ratings, and influencer-related marketing fraud. Some of these potential problems differ from those facing traditional credit rating agencies, while others parallel traditional agency problems. Understanding the problems that exist, we will dis- cuss how the reforms put into place by Dodd-Frank are insuf- ficient to address such problems. However, to preface our dis- cussion of reforms it will first be shown that ratings have a significant impact on cryptocurrency. If they did not, there would be little reason to recommend reforms to improve the cryptocurrency ratings paradigm. A. Market Manipulation in the Cryptocurrency Space One major concern surrounding cryptocurrency markets is market manipulation, whereby individuals artificially inflate or deflate the price of a security.82 In a recent study investi- gating cryptocurrency market manipulation, Professors John Griffin and Amin Shams found that between March 2017 and March 2018 Bitcoin’s price rose nearly fifty percent as a result of trades between Bitcoin and another cryptocurrency called Tether.83 According to their research, Tether was used by anonymous parties to illegally inflate the price of Bitcoin over the period in question.84 This alarming conclusion of the study prompted an investigation by federal prosecutors into 82 See Fast Answers: Manipulation, SEC. & EXCHANGE COMMISSION (Mar. 28, 2008), https://www.sec.gov/fast-answers/answerstmanip- ulhtm.html [https://perma.cc/9BXA-4V5B]. 83 See Griffin & Shams, supra note 12 (examining statistics regarding the impact of Tether on Bitcoin and other cryptocurrencies over the identi- fied period). 84 Id. at 8 (“The patterns observed . . . are consistent either with one large player purchasing Tether with cash at Bitfinex and then exchanging it for Bitcoin, or Tether being printed without cash backup and pushed out through Bitfinex in exchange for Bitcoin.”). 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 672 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 whether Tether was indeed used to manipulate the price of Bitcoin.85 Most shockingly, one market player, known as “1LSg,” is thought to have been the sole culprit behind the majority of the trading patterns documented by Griffins and Shams.86 With hundreds of cases now documented, market manipula- tion schemes remain a common occurrence in the cryptocur- rency space.87 As more participants enter cryptocurrency mar- kets, the threat of a cryptocurrency price collapse grows more dire.88 In other words, the more cryptocurrencies are relied upon by the public, the higher the stakes for their stability. B. “Ratings Shopping” Creates a Conflict of Interest The conflicts of interest between rating agencies and issu- ers are made clear by understanding first who the customer is in the private credit rating agency business model. In an is- suer pays model, issuers pay a rating agency to rate their fi- nancial product.89 It follows, then, that credit rating agencies can generate higher revenue by providing issuers with higher 85 Matt Robinson & Tom Schoenberg, U.S. Launches Criminal Probe into Bitcoin Price Manipulation, BLOOMBERG (May 24, 2018), https://www.bloomberg.com/news/articles/2018-05-24/bitcoin-manipula- tion-is-said-to-be-focus-of-u-s-criminal-probe [https://perma.cc/U6HM- TSCZ]. 86 Billy Bambrough, The Real Reason Behind Bitcoin’s Epic Rally Re- vealed?, FORBES (Nov. 8, 2019), https://www.forbes.com/sites/billybam- brough/2019/11/08/real-reason-behind-bitcoins-epic-rally-re- vealed/#4caa100a332b [https://perma.cc/J4JZ-WCSV] (recounting how “an unidentified Bitfinex account used Tether to manipulate the bitcoin price by creating unprecedented demand for the digital token”). 87 See Jiahua Xu & Benjamin Livshits, The Anatomy of a Cryptocur- rency Pump-and-Dump Scheme, 2019 USENIX SECURITY SYMP. 1609 (de- scribing and empirically examining the phenomenon of “pump-and-dump” activities within cryptocurrency markets). 88 See Ryan Clements, Comment, Assessing the Evolution of Cryptocur- rency: Demand Factors, Latent Value, and Regulatory Developments, 8 MICH. BUS. & ENTREPRENEURIAL L. REV. 73, 91 (2018) (noting that increased institutional participation in the Bitcoin futures market could lead to an increase in “at-risk participation” threats and “interdependence” risks). 89 See RIVLIN & SOROUSHIAN, supra note 50. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 673 ratings for their financial products. This creates an incentive for credit rating agencies to issue higher ratings regardless of their accuracy. Thus, in addition to the problem of traditional rating agencies loosening their evaluative standards to earn more business, there exists a similar, parallel problem of issu- ers purchasing positive ratings. Issuers of cryptocurrencies are thereby effectively able to purchase the degree of their own creditworthiness. C. Social Media and Potential Rating Fraud Concerns While cryptocurrency ratings are not yet extremely wide- spread in the U.S. economy, one area which we may analogize from is that of social media influencer marketing. Novel as it may seem, social media personalities charge thousands of dol- lars to provide video reviews for cryptocurrencies in exchange for payment in the cryptocurrencies they are analyzing.90 This provides yet another massive conflict of interest in crypto markets, as reviewers are incentivized to provide positive en- dorsements for cryptocurrencies regardless of the actual value of the cryptocurrency being reviewed. One specific example of how influencer endorsements can impact the perceived value of a cryptocurrency can be found in the case of Ukrainian startup “Hacken.”91 Hacken, looking to promote its new coin, found nearly 200 social media person- alities in the crypto space to help them create a positive repu- tation.92 In light of the SEC’s stated view that “virtual coins or tokens may be securities and subject to the federal securi- ties laws,” this behavior may constitute fraud.93 The SEC has 90 Anna Irrera & Elizabeth Dilts, Special Report: Little Known to Many Investors, Cryptocurrency Reviews Are For Sale, REUTERS (Nov. 27, 2018), https://www.reuters.com/article/us-crypto-currencies-promoters-spe- cialre/special-report-little-known-to-many-investors-cryptocurrency-re- views-are-for-sale-idUSKCN1NW17S [https://perma.cc/H2ZQ-QC2Y]. 91 Id. 92 Id. 93 Press Release, Securities and Exchange Commission, SEC Issues In- vestigative Report Concluding DAO Tokens, a Digital Asset, Were Securi- ties (July 25, 2017), https://www.sec.gov/news/press-release/2017-131 [https://perma.cc/RY5B-FTFC]. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 674 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 gone on to provide a specific warning about ICOs, explaining that “any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the pro- motion.”94 D. Initial Coin Offering (“ICO”) Fraud Concerns To illustrate another way in which fraud can be observed in crypto markets, a company called Alethena Ratings re- cently conducted an inquiry into just how easy it is to buy, rather than earn, a favorable ICO rating.95 As a result of this investigation Alethena uncovered several instances of suspi- cious behavior, indicating the shocking ease with which bi- ased ICO ratings may be purchased. 96 In addition to the purchasable nature of high ICO ratings, there is another concern research has highlighted, showing that the computer code behind ICOs does not properly protect investors.97 Indeed, researchers have noted that “[f]ar from re- placing (or seamlessly extending) law and norms, code is often falling short of expectations. It sometimes fails to deliver key 94 Press Release, Securities and Exchange Commission, SEC State- ment Urging Caution Around Celebrity Backed ICOs (Nov. 1, 2017), https://www.sec.gov/news/public-statement/statement-potentially-unlaw- ful-promotion-icos [https://perma.cc/42UT-Z647]. 95 Markus Hartmann, This Is How Easy It Is to Buy ICO Ratings—An Investigation, MEDIUM (June 14, 2018), https://medium.com/alethena/this- is-how-easy-it-is-to-buy-ico-ratings-an-investigation-13d07e987394 [https://perma.cc/J368-H2MV]. 96 Id. (“A closer inspection of the websites of ICObench and similar rat- ing providers showed that ICO rating visibility is by no means impartial. In fact, it is influenced by the wallets of the respective ICOs. ICObench offers ICOs so-called premium listing services. In exchange for some Bitcoin (de- pending on how long the service is provided), ICOs can purchase a top rank- ing in the ICO overview, be featured in the newsletter, and also be positioned on the profile pages of their competitors. At the same time, these competitors will be blocked from appearing on the profile pages of paying ICOs.”). 97 Shaanan Cohney, et al., Coin-Operated Capitalism, 119 COLUM. L. REV. 591, 659 (2019) (demonstrating generally that “the current struc- tures—markets, formal organizations, and professional communities— where ICOs take place are producing a disconnect” between “technoliber- tarian beliefs” and “actual ICO practices”). 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 675 investor protections, and can provide founders with signifi- cant, undisclosed authority to alter the terms of investor en- gagement.”98 This concern only magnifies the problem of pur- chasing ICO ratings, seeing as fraudulent ICOs can simply pay to receive high ratings despite consisting of a shoddy un- derlying technical framework. Indeed, the “hackable” reputa- tion of ICOs through websites like ICObench should be espe- cially concerning for investors who rely on such ratings as an indicator of value.99 E. Dodd-Frank Did Not Fix the Aforementioned Problems The goal was to encourage rating agencies to provide unso- licited ratings to issuers, and to push back on issuers’ influ- ence over rating agencies.100 Unfortunately, the SEC’s current approach is not working.101 The problem is that such unsolic- ited ratings have rarely been provided, most likely due to credit rating agencies’ fear that they might anger issuers and lose business in the process.102 Dodd-Frank mandates that the SEC study and review the standardization of credit ratings.103 This push for standardi- zation is likely to encounter resistance given that rating pro- viders make a business of offering their own unique rating services to the market. If standardization were to occur, one might wonder how firms would distinguish themselves. Per- haps individualization would occur by additional services be- ing offered, since rating agencies could presumably no longer offer a rating for a price. 98 Id. 99 Id. at 649. 100 See Cezary Podkul, SEC Fix for Conflicts of Interest at Credit-Rat- ings Firms Has Failed, WALL ST. J. (Oct. 29, 2019), https://www.wsj.com/ar- ticles/sec-fix-for-conflicts-of-interest-at-credit-ratings-firms-has-failed- 11572341401 [https://perma.cc/T646-NA6D]. 101 Id. 102 Id. 103 Dodd-Frank Act, Pub. L. No. 111-203, § 932, 124 Stat. 1376, 1875 (2010). 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 676 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 Still, Dodd-Frank has been heavily criticized for not doing enough to reform the credit rating process after the last eco- nomic crisis, as seen in an article titled, What’s (Still) Wrong with Credit Rating Agencies.104 The primary message of the article is that the credit rating reforms implemented by Dodd- Frank were failures, and thus the same risks that led to the 2008 crisis remain as market vulnerabilities.105 The author, Frank Partnoy, derides ratings as a concept, noting that: Letter ratings are a crude mechanism for information intermediation. Letter ratings obscure the analysis of the key variables that matter in the analysis of credit: probability of default, expected recovery in the event of default, and the correlation of defaults. The meth- odologies I critique in this article are disconnected from that analysis. If the markets experience another crisis related to credit ratings, and ratings prove again to have been ‘garbage out,’ then during the next regu- latory response it will be important to understand more clearly the role of the ‘garbage in’ (i.e., rating agency methodology).106 The rating methodology Partnoy disparagingly refers to is key for the public to understand if they are to continue to safely rely on ratings. Since ratings are not likely to fade out of use entirely, perhaps a practicable system is one where rat- ing oversight occurs, creating an environment in which inves- tors can feel comfortable relying on ratings as a part of their investment process. Rating oversight is particularly applica- ble to the world of cryptocurrency where there are not many consistently reliable sources that assess the value of specific cryptocurrencies.107 104 Frank Partnoy, What’s (Still) Wrong with Credit Ratings, HARV. L. SCH. F. ON CORP. GOVERNANCE (May 31, 2017), https://corpgov.law.har- vard.edu/2017/05/31/whats-still-wrong-with-credit-ratings/ [https://perma.cc/KJ4Z-PEX2]. 105 Id. 106 Id. 107 Tom Goldenberg, The Hard Thing About Crypto Price Valuation, COINDESK (Feb. 15, 2018), https://www.coindesk.com/hard-thing-crypto-val- uation [https://perma.cc/SZ6A-AMTB]. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 677 IV. PROPOSED SOLUTION – CREATING A PUBLIC AGENCY TO PROVIDE CRYPTO RATINGS A. Justification for Proposed Solution This Note proposes that the United States create a public agency to provide ratings for cryptocurrencies without bias or conflicts of interest present. While this may seem to be a dif- ficult task, acknowledge that Weiss already refuses to accept compensation of any kind from the entities it rates, thereby eliminating a disruptive conflict of interest.108 On the issue of rating accuracy, the Government Accountability Office re- ported that Weiss’ ratings of life and health insurers better reflected financial vulnerability than those of Moody’s and S&P.109 However, the existence of Weiss does not remove the need for a public agency in the crypto rating space—Weiss still operates as a private company, and has previously been under SEC scrutiny for distributing “materially false and misleading marketing materials.”110 B. Learning from Credit Rating Agencies Several commentators have proposed the public agency so- lution for credit rating agencies.111 The appeal of a public credit rating agency centers around promoting transpar- ency.112 In the view of those who have advocated for a public agency’s creation, a public agency wouldn’t eliminate the need for private agencies.113 Instead, “private agencies would be free to continue operating . . . [b]ut when their appraisals 108 See supra Section II.D. 109 U.S. GEN. ACCOUNTING OFFICE, GAO/GGD-94-204BR, INSURANCE RATINGS: COMPARISON OF PRIVATE AGENCY RATINGS FOR LIFE/HEALTH INSUR- ERS 2 (1994). 110 Weiss Research, Inc., Exchange Act Release No. 60125, 2009 WL 1684731, at *1 (June 17, 2009). 111 M. Ahmed Diomande et al., Why U.S. Financial Markets Need a Public Credit Rating Agency, ECONOMISTS’ VOICE, June 2009, at 1. 112 Id. at 2. 113 Id. at 2–3. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 678 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 differ significantly from those provided by the public agency, the private agencies would be forced to explain the basis for their divergent assessments.”114 Many individuals are currently pushing for innovation in the nascent crypto landscape.115 While established rating agencies have achieved near oligopolistic control of the credit rating market, similar dominance and control has not yet been observed in the crypto ratings market. As players like Morn- ingstar begin to issue cryptocurrency ratings, the need for scrutiny of crypto ratings is an urgent concern, given that other major credit rating agencies may follow suit and enter the space. A public crypto rating agency would serve as a corrective force for the rampant conflicts of interest that currently plague credit ratings.116 A public crypto rating agency would allow financial markets to operate with more transparency, and thus would enable investors to make more informed deci- sions. Such transparency would come from the benchmark an unconflicted public actor would provide. Additionally, to protect investors a public agency could be empowered to decide that certain financial instruments are too complex to properly assess.117 Private rating agencies are unlikely to admit that an instrument is “not ratable” because of the incentives inherent in the issuer pays compensation model.118 As noted above, the recommendation of having a public agency does not necessarily entail eliminating private rating providers. Such an endeavor seems unrealistic given private agencies’ current presence and likely future involvement in the cryptocurrency rating space. Nevertheless, the presence of a public agency would at the very least offer an additional 114 Id. at 3. 115 George Nethercutt, Washington Must Defend American Crypto In- novation, Not Crush It, HILL (Jan. 14, 2019), https://thehill.com/opin- ion/technology/425225-washington-must-defend-american-crypto-innova- tion-not-crush-it [https://perma.cc/2CJ7-AYC8]. 116 See supra Section III.B. 117 See Diomande et al., supra note 111, at 2. 118 See RIVLIN & SOROUSHIAN, supra note 50. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 679 source of information investors could rely upon in making fi- nancial decisions. C. Operating Details of Proposed Public Agency The proposed public agency could operate by requiring that all cryptocurrency issuers obtain a rating from the agency be- fore their cryptocurrencies could be legally traded. If this is considered to be too extreme, then at the very least the ratings of the public agency could serve as a point of comparison with those of the private agencies. Generally, research indicates that “rating agencies not only publish more, but also more ac- curate information in [the] case of multiple ratings.”119 This research indicates that additional rating data points provided by a public agency could help improve the accuracy of ratings provided by private actors. Some might argue that competition between private agen- cies would solve these problems, but unfortunately the issuer pays model creates conflicts of interest that do not incentivize private rating agencies to compete to develop the most accu- rate rating methodology.120 Instead, most private actors are stuck in a profit-driven mindset that distracts them from the realities of the economy. In contrast to the existing rating agency incentive structure, a public agency would not receive any benefits from offering high or low ratings, and thus con- flicts of interest would be minimized. V. EVALUATING POTENTIAL REFORMS TO SUPPLEMENT THE PROPOSED SOLUTION In order to make a real impact on the cryptocurrency rat- ing process, additional reforms should supplement the crea- tion of a public rating agency. However, these reforms are use- ful regardless of whether a public agency is created. As discussed in Section III.B, the issuer pays model creates 119 Stefan Morkoetter et al., Competition in the Credit Rating Industry: Benefits for Investors and Issuers, 75 J. BANKING & FIN. 235, 236 (2017). 120 See supra Section III.B. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 680 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 significant conflicts of interest that result in an incentive structure that does not reward accuracy.121 One proposal that would address this incentive problem is to remove credit ratings altogether.122 However, it is ex- tremely unlikely that private rating providers will disappear, largely because they serve as gatekeepers to capital mar- kets.123 Thus, it is important to assume that private rating providers will continue to exist. Since the removal of private rating agencies is unlikely to occur, we must work to improve the current ratings framework, regardless of whether a public cryptocurrency rating agency is ever actually created. A. Applying Dodd-Frank Credit Rating Reform to Cryptocurrency Rating Providers One approach to supplemental reform lies in looking at how Dodd-Frank’s credit rating reforms may be relevant to cryptocurrency rating providers. The argument is not that all Dodd-Frank provisions relevant to credit rating agencies should be blindly applied to the cryptocurrency space. Instead, crypto rating providers may be able to learn from specific sec- tions of Dodd-Frank in ensuring that the value and legitimacy of a currency is represented through fair ratings. Section 933 of Dodd-Frank is especially relevant to crypto- currency rating providers. This is not to say that other sec- tions of Dodd-Frank should not be applied to cryptocurrency rating providers, but just that section 933 provides a useful example of how such applications can be made. Section 933 121 See id. See also Joseph William Singer, Foreclosure and the Failures of Formality, or Subprime Mortgage Conundrums and How to Fix Them, 46 CONN. L. REV. 497, 556 (2013) (“The current system puts the rating agencies in the pocket of the securitizing banks and gives them incentives to mislead investors. It would be better if incentives could be changed to put the rating agencies on the side of the investors rather than the sellers of securities. And if that is not possible, then they should be replaced by a professional, expert public agency.”). 122 Christopher C. Nicholls, Public and Private Uses of Credit Ratings (Aug. 1, 2005) (unpublished manuscript), https://papers.ssrn.com/sol3/pa- pers.cfm?abstract_id=1625839 [https://perma.cc/5RL9-K9U8]. 123 See Wolfson & Crawford, supra note 39, at 87. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 681 addressed the issue of whether statements made by credit rat- ing agencies were “forward-looking” and thus exempt from li- ability.124 While such statements were previously considered to be forward-looking and exempt, section 933 reversed course by deeming credit rating agency statements “statements made by a registered public accounting firm or a securities an- alyst under the securities laws.”125 This language effectively created a private right of action against credit rating agen- cies.126 Applying this section to cryptocurrency rating provid- ers could disincentivize inaccurate ratings and fraudulent be- havior. As cryptocurrency ratings become more prominent, further research should be conducted into whether Dodd- Frank’s credit rating reforms should be applied to cryptocur- rency rating providers. B. SEC Reform Should Extend Beyond Current State to Help Small Rating Providers Compete Next steps could involve providing smaller rating agencies in the crypto space a more meaningful opportunity to compete in the ratings market. Concern for the future of cryptocur- rency ratings stems from the problems observed in the opera- tion of traditional credit rating agencies. Currently, the rat- ings market is dominated by a few large credit rating agencies, which effectively prevents smaller agencies from competing or surviving. Consider the example of Egan-Jones, a small ratings company that adopted an investor-pays com- pensation model.127 Operating with an incentive structure de- signed only to protect investors, Egan-Jones has proven the remarkable accuracy of its ratings. Indeed, in 2008 “Egan- 124 Dodd-Frank Act, Pub. L. No. 111-203, § 933, 124 Stat. 1376, 1883 (2010). 125 Id. See also 17 C.F.R. § 230.175 (2019). 126 Id. See also Allana M. Grinshteyn, Note, Horseshoes and Hand Gre- nades: The Dodd-Frank Act’s (Almost) Attack on Credit Rating Agencies, 39 HOFSTRA L. REV. 937, 955 (2011). 127 Stephen Moore, Opinion, Credit Rating Agencies Running a Racket, BOS. HERALD (Oct. 11, 2018), https://www.bostonher- ald.com/2018/10/11/credit-rating-agencies-running-a-racket/ [https://perma.cc/D6KM-TR27]. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 682 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 Jones was one of the first to sniff out the ticking time bombs of mortgage-backed securities that the others were saying were completely free of risk. Egan-Jones also beat S&P and Moody’s in downgrading Bear Stearns and Lehman Brothers before they became the first two firms to collapse in the wake of the meltdown.”128 Commentators have reflected on the per- formance of Egan-Jones by arguing that “[w]hat is desperately needed is a new model where the credit raters work for the investors and where there are many competitors to choose from.”129 Another solution that could address the oligopoly problem in the credit rating arena could be getting rid of the NRSRO designation altogether.130 Policy analysts have indicated that an oligopoly has been created through the NRSRO system.131 Such an oligopoly can negatively impact the productivity of the profit-driven credit rating agencies.132 Specifically, ana- lysts have argued that, as a result of NRSRO designations the credit rating agency market should be expected “to be gener- ally resistant to competitive pressure, be dominated by few firms, have high profits, and have restricted output sup- plied.”133 Additionally, the same authors went on to explain that “[w]ithout the threat of competition, oligopolistic CRAs are likely to become more complacent in their methodologies. Also, with fewer firms and reduced competition, markets may find it less likely to discover new tools to better measure credit risk.”134 128 Id. 129 Id. 130 See EKINS & CALABRIA, supra note 38, at 12 (“Although reputational factors create some natural barriers to entry in the CRA market, most of the barriers to entry result from the regulatory designation of NRSRO CRAs.”). 131 See id. 132 See id. It should be noted that, in the context of the credit rating agency market, “[r]estricted output supplied can be in terms of informa- tional output (quality as a dimension of quantity), rather than the sheer number of ratings produced.” Id. 133 Id. 134 Id. 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 683 Getting rid of the NRSRO system is easier said than done. In fact, some of the existing literature that has considered the public agency proposal also has acknowledged that there ap- pears to be minimal support for the abolishment of the NRSRO designation.135 Nevertheless, elimination of the des- ignation should be striven for in hopes of allowing smaller rat- ing providers to compete, and encouraging the provision of more accurate ratings. C. Implementing Incentive-Based Compensation for Rating Agencies Incentive-based compensation for rating agencies is one potential approach that may be pursued to address the issue of inaccurate ratings. Current reforms’ focus on rating agency liability may ironically lead to less accurate ratings, as liabil- ity exposure does not necessarily incentivize rating agencies to rate accurately.136 Rather, under section 933’s liability re- gime, agencies are incentivized to simply avoid negligence.137 However, the incentive structure of agencies could be ad- dressed by shifting away from the issuer pays framework to- ward an incentive-based compensation model. An interesting essay explores this idea, proposing that credit rating agencies be paid by the debt they rate.138 In this scheme, “[i]f a CRA overrates debt, then the CRA suffers a financial penalty be- cause the debt the CRA receives as compensation is less valu- able than the cash compensation that the debt is replacing.”139 Tying the compensation of rating agencies to the success of the debt instruments they rate may encourage the provision of more accurate ratings. 135 See Nicholls, supra note 122. 136 Yair Listokin & Benjamin Taibleson, If You Misrate, Then You Lose: Improving Credit Rating Accuracy Through Incentive Compensation, 27 YALE J. REG. 91, 113 (2010). 137 Id. 138 Id. at 91. 139 Id. 4_2020.2_KALARIA (DO NOT DELTE) 10/21/2020 2:04 PM 684 COLUMBIA BUSINESS LAW REVIEW [Vol. 2020 An additional form of incentive-based compensation could involve tax credits.140 Under this scheme, private rating agen- cies that accurately assess the risk of a financial instrument could be rewarded with tax credits.141 This proposal would first require developing a measure of ratings accuracy and set- ting accuracy benchmarks that rating providers must meet to receive credits.142 In offering a positive incentive for accurate ratings, rating agencies would be incentivized to rate accu- rately, ideally counteracting the conflict of interest intrinsic to the issuer pays model.143 D. Proposing Additional Factors for Cryptocurrency Rating Providers to Consider An additional focus of reform could be the rating process itself. The challenge presented in reforming the ratings pro- cess is a lack of complete transparency into the methodologies used by cryptocurrency rating providers. Although it would be unrealistic to expect companies like Weiss and Morningstar to disclose their entire rating methodology, a better understand- ing of what factors are used in cryptocurrency ratings could allow for better future policy recommendations to improve the ratings process. An additional, more unique factor to take into account is the presence of an environmental risk metric.144 Oftentimes, the mining process behind cryptocurrencies is extremely en- ergy intensive, leading to large monetary and environmental costs.145 As a result, some cryptocurrencies may be harder to 140 Timothy E. Lynch, Deeply Persistently Conflicted: Credit Rating Agencies in the Current Regulatory Environment, 59 CASE W. RES. L. REV. 227, 301 (2009). 141 Id. 142 Id. 143 Id. 144 Kate Duguid, Fitch Adds Environmental Risk Metric to Mortgage- backed Securities Ratings, REUTERS (June 5, 2019), https://af.reu- ters.com/article/energyOilNews/idAFL2N23C1C4 [https://perma.cc/YY6H- FRR3]. 145 Alex Hern, Bitcoin’s Energy Usage is Huge – We Can't Afford to Ig- nore It, GUARDIAN (Jan. 17, 2018), 4_2020.2_KALARIA (DO NOT DELETE) 10/21/2020 2:04 PM No. 2:656] RATED P FOR PUBLIC 685 adopt on a global scale as society becomes more aware of the environmental consequences of its actions. Weiss, for exam- ple, currently factors “energy efficiency” into its cryptocur- rency rating formula.146 VI. CONCLUSION With the move of Morningstar into the crypto rating space, now is the time to consider how lessons learned from credit rating agencies and Dodd-Frank can be applied to improve the accuracy of cryptocurrency ratings. The role that credit rating agencies played in causing the 2008 economic crisis cannot be denied. Thus, if cryptocurrencies are to achieve the level of prominence that other mainstream securities have enjoyed, investors must be confident in their value. To establish the requisite level of confidence, investors will increasingly rely on cryptocurrency ratings, making it even more important that such ratings properly characterize crypto assets. The lens through which we view the problem presented by rating cryptocurrencies is critical. Instead of waiting passively for issues to arise and responding reactively, we should place increased scrutiny on cryptocurrency issuers and rating pro- viders now. We must also change incentives for rating provid- ers to ensure that conflicts of interest are minimized and rat- ings are accurate. The current system incentivizes rating providers to mislead investors by teaming up with issuers. Ideally, incentives should shift towards putting rating agen- cies on the side of issuers, perhaps by creating a public crypto rating agency. While entirely replacing private crypto rating agencies is not essential, it is critical that the reforms adopted address the rampant conflicts of interest present in the cryptocurrency ratings world so that the crypto ratings ultimately issued can be trusted to provide a reliable source of information for in- vestors. https://www.theguardian.com/technology/2018/jan/17/bitcoin-electricity-us- age-huge-climate-cryptocurrency [https://perma.cc/9C7T-NFFL]. 146 See About, supra note 67.