SEC Chairman Says Most Crypto ICOs are Securities; Bloodbath For Tokens?

It may be the wrong time for crypto investors to hold onto tokens issued by initial coin offering (ICO) projects.

On CNBC, Jay Clayton, the chairman of the U.S. Securities and Exchange Commission (SEC) emphasized once again that most ICOs that are being talked about by investors in the global cryptocurrency market are considered securities under U.S. laws.

If a token is sold during an ICO to investors in the U.S. and the token is acknowledged a security by the SEC, it could become subject to a penalty imposed by the SEC, which then could lead to the allowance of investors to file for refunds based on the value of their initial investment.

Bitcoin is Not a Security But Most Tokens are Securities

Dozens of ICOs are already being investigated by the SEC and in the months to come, the SEC expects to crackdown on more projects that raised money from U.S. investors through the distribution of unregistered securities.

The SEC chairman firmly stated that bitcoin is not a security and several SEC officials have also said that Ethereum is considered a non-security. But, most tokens that are in existence in the market are seen as securities by the commission, which leaves them vulnerable to investigations.

Clayton said:

“We don’t believe Bitcoin is a security. Many of the ICOs that you see and you talk about, they are securities. And if you’re going to offer or sell securities, you have to do so in compliance with our laws. We’ve been clear about that, the recent actions further emphasized that our securities laws to apply to the ICO space, and if people are going to raise money using initial coin offerings they either have to do so in private placement or register with the SEC.”

Most tokens, even those with active developer communities, strong products, partnerships, and user bases, are down on average 80 percent to 98 percent. Given the substantial decline in the price of tokens, low market cap tokens could appeal to traders in the market. But, some have fallen more than 90 percent against Bitcoin (BTC), which fell by 82 percent since its all-time high at $19,500, and the sell-pressure on tokens is increasing.

Currently, the SEC is employing a strategy of taking down the biggest ICOs in their respective sectors, as seen in its recent settlement with Paragon and and Airfox. It likely will not go after large-scale projects like Ripple (XRP) that could lead to a full-fledged lawsuit, and Ripple is already dealing with a federal lawsuit that will provide clarity on the regulatory nature of the asset.

The SEC’s stance towards ICOs is quite clear; but the guideline on which tokens are considered as securities and which are not remains uncertain. Airfox and Paragon both claimed to operate as utility tokens to prove that they are not securities but the SEC denied the justification.

As U.S. based attorney Stephend Palley wrote:

“PRG token sale was an unregistered securities offering; PRG tokens are securities and order provides detailed analysis of sale and remedial actions. Analysis applies to just about every token sale in the last 2 years.”

Not the Right Time

0x (ZRX) and Brave Attention Token (BAT), two tokens listed by Coinbase, are considered to be immune from the SEC’s crackdown on tokens. Coinbase explicitly described in June that it will only list tokens that are approved by the SEC as a non-security.

Apart from the two, there simply isn’t any guideline available to prove that a token is a non-security and as such, due to the regulatory uncertainty, it is not the right time to invest or hold onto tokens.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Joseph Young is a finance and tech journalist based in Hong Kong. He has worked with leading media and news agencies in the technology and finance industries, offering exclusive content, interviews, insights and analysis of cryptocurrencies, innovative and futuristic technologies.