“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.

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.

Earn.com 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.

“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.

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.

CoinDesk has reported on several forthcoming attempts to launch an ATS, including Templum and tZERO. An existing alternative trading platform has also recently launched the OpenFinance Network, with its token trading platform opening in April, a spokesperson said.

But no real trading is going on using these platforms yet, other than one security available in Templum’s private beta and the sale of Overstock shares on its platform.

Chris Pallotta, CEO and co-founder of Templum, told CoinDesk that he expects to open the platform up in a matter of months, however. With most security tokens still in their 12-month holding period, he said, “I think the timing will work out pretty nicely.”

Even if Templum were to go live soon though, it may find it doesn’t have much product for its order books, as it will take a while for tokens created in the boom to get through that holding period.

That’s also assuming there are no additional holdups, and if the ICO space has shown anything, that might be a big if.

As Lempres put it to members of Congress:

“If the U.S. does not provide a clear, thoughtful regulatory environment, the investment can move very quickly to other countries.”

Additional reporting by Pete Rizzo.

Frozen money via Shutterstock.