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ICOs Iced: A 12-Month Freeze on US Token Trading May Just Be Beginning

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Coindesk | Brady Dale | March 19, 2018

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"The market is being chilled."

Issued by Mike Lempres, chief legal and risk officer at Coinbase, the statement captures the mood of the moment for crypto innovators in the U.S. as regulatory uncertainty and months of wanton market growth appear to be finally coming to a head.

Spurring the shift is that the SEC finally confirmed last week what had been long rumored, that it's investigating companies and startups associated with initial coin offerings (ICOs). In response, entrepreneurs are largely surrendering on the idea new cryptocurrencies created and sold to investors could be considered so-called "utility tokens," a term denoting a digital commodity meant to represent the share of a blockchain protocol.

Still, U.S. companies preparing to issue tokens as securities may not have an easier time reaching buyers. There's no registered broker-dealer capable of trading security tokens in the U.S. yet. And as multiple founders pointed out to CoinDesk, as issuers shift to issuing these tokens under a Regulation D exemption, most are still under the 12-month lock-up required by the rules.

See:  Crypto Industry Should Self Regulate, Says CFTC Commissioner

At the MIT Bitcoin Expo this weekend, the issue was on display in a panel that struck a sour note on the state of ICOs. There, Nick Ayton, CEO of blockchain funding platform Chainstarter, went so far as to predict U.S. regulators will view every token as a security.

"Most exchanges are listing coins that are securities, and our view is a large number of these exchanges are going to be closed," he told the crowd.

Even a panel on regulation more generally saw talk of the concern, with former CFTC chair and MIT professor Gary Genseler indicating his belief action on exchanges could be ahead.

"I think it is without a doubt that numerous exchanges will have to seek exemptions under alternative trading system [rules] because many of the exchanges, not all, have tokens that are securities trading on them," he explained.

But it's not just existing exchanges, businesses seeking to fill the market need may be held up.

As Gensler and others have put forward, participants in this new market think they might know what's forbidden, but no one can be sure until regulators address cryptocurrency more specifically.

Joshua Ashley Klayman, counsel at Morrison Foerster, told CoinDesk:

"People who want to comply and don't want to do something wrong are left trying to find the rules."

Death of utility tokens

Stepping back, the market disarray perhaps shouldn't be surprising.

The SEC's decree on a little-known ICO called Munchee in December should have landed like a bomb, but it has rather had a delayed reaction, its shockwave not really hitting the industry until rumors began circulating that the SEC had issued a wave of subpoenas earlier this month.

With Munchee, "what the federal regulators think of as a utility token and not a security token is so small, and the eye of the needle got even smaller," Klayman explained.

For a while there, companies seemed to think that even if utility tokens couldn't be sold to the general public, they could still be given away (in what's usually called an airdrop). However, we recently reported on how that's probably an SEC violation there, as well. has been facilitating airdrops of tokens to its pool of verified users, and, Dave Bean, of the company's sales team, told CoinDesk that "geo-filtering has become a very popular feature" for issuers that want to avoid the U.S.

Other new issuers are just abandoning retail investors.

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"I have perceived a trend in the market wherein legitimate projects seeking to issue a native token for functional networks are steering toward relying on the Reg D exemption within the U.S.," Tekin Salimi, a project manager at Polychain Capital, told CoinDesk.

As reported, the rule requires purchasers to be accredited investors, which means they must have a minimum net worth of $1 million, or have earned $200,000 annually for the last two years.

That said, there have been plenty of market participants that never believed unregistered tokens could work under SEC laws, and have factored such options into their models. Long-time entrepreneurs have moved in, offering platforms built specifically with different regulatory regimes in mind, such as TokenSoft.

But it's still hard to imagine how a product that, say, creates a tokenized VPN, one that both pays people for broadband and lets them buy it back with the same token, works if those tokens are securities.

Caitlin Long, an industry veteran who helped move legislation on utility tokens through the Wyoming legislature, has even asked whether federal securities rules could be applied in ways where they may harm the user experience of more popular projects to the point where they're no longer even feasible.

See:  OSC approves first ICO in Ontario to TokenFunder

For example, she raised the idea that, should utility tokens be outlawed entirely, users of filecoin, a distributed online storage system, might need to use a brokerage to hold the tokens they need just to back up files.

Liquidity and trading

But even if an exchange goes live, the final issue for ICO projects in the U.S. is liquidity.

The trouble is that there's no unified place to trade tokens that's registered with the SEC now. As several founders have pointed out, that doesn't mean that trading is impossible, it's just not as easy.

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NCFA Jan 2018 resize - ICOs Iced: A 12-Month Freeze on US Token Trading May Just Be BeginningThe National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders across the country. NCFA Canada provides education, research, industry stewardship, and networking opportunities to over 1600+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  For more information, please visit:

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