Initial coin offerings (ICOs) were all the rage in 2016. These token offerings raised more than $200 million for various projects during the course of the year, with the largest one (The DAO) also being the new technology’s biggest failure.

Many of the ICOs launched these days are built on Ethereum, which is a platform that itself was launched through the ICO process. ConsenSys is the largest Ethereum-focused startup in existence, but Jeremy Millar, who is the company’s chief of staff, says they take a skeptical approach to many of the ICOs that have been launched over the past year.

Millar displayed his skepticism of ICO projects at the recent Blockchain Week 2017 event in London, England. During his appearance on a panel at the event, Millar explained, “Although our founder effectively ran the Ethereum ether token launch and we’ve done our fair share of token launches, we have a fair amount of skepticism for the viability of most of them.”

Millar also summed up ConsenSys’s view on how to complete an initial coin offering as, “Build software, not tokens.”

If You Put a Security on the Blockchain, It’s Still a Security

While the other panelists were more bullish on the ability for ICOs to revolutionize the global economy by allowing anyone in the world to raise capital with the click of a button, Millar attempted to remain more practical when it was his turn to speak.

“If you go and do something that fails the Howey Test and market in the US, the SEC will come after you,” Millar bluntly stated.

“The risk we see in token issuances fundamentally is: Are they a security or not?” continued Millar. “If you develop a token that is a security—and a lot of the tokens look like a security—you are subject to securities laws, and there’s nothing the blockchain does about that. If you sell something that’s a security and you have not registered it correctly, you are breaking securities laws.”

With Bitcoin, many use cases have involved the concept of regulatory arbitrage. Use cases for other blockchains have been less clear up to this point.

If regulatory arbitrage turns out to be the main use case of the blockchain, then the viability of the ICO model seems unclear. After all, it’s easy for a regulatory agency to shut down some sort of digital token offering if there is a centralized entity behind the token that can be targeted.

How Do You Avoid Creating a Security?

In Millar’s view, the best way to avoid the creation of a security during an ICO is to focus on the software rather than the token. He pointed out that, for example, Ethereum was sure to clearly define the role of ether in its system before launching their ICO.

Other panelists tried to make the case that lawmakers should wait to see how this new technology of digital token issuance evolves before regulating it out of existence, but Millar’s key point was that these regulations already exist.

Millar also brought up the Howey Test on multiple occasions. The Howey Test is a test developed by the Supreme Court of the United States to determine whether a financial instrument is a security. To be considered a security, the instrument must involve investment into a common enterprise with the expectation of profits due to the efforts of a promoter or other third party.

Millar noted that gyms have been sued in the past for accidentally structuring their memberships in a way where they could be considered securities. In other words, it’s important to understand the legal implications of issuing any sort of token.

Millar also explained that ICO token issuers need to be careful to avoid the creation of a swap. “If I’ve created a swap, I’ve created a security,” he said.

In Millar’s view, it’s also unclear whether regulators will take action against those who have already issued tokens on platforms like Ethereum. “Regulators have, depending on the jurisdiction, five to seven years to go and look back, so the idea that there’s been 200 million [British] pounds of ICOs and the regulators don’t care is not necessarily true,” he explained. “Every single one of those people could face a regulatory investigation for the next five years.”

Then again, you can still issue a security by way of a digital token if you’re willing to follow all of the proper guidelines and regulations.

What is the Point of Doing an ICO?

Although the main topic of this particular panel at Blockchain Week was ICOs, not much discussion on the reasons for doing an ICO took place. A question on this point was eventually asked by someone in the audience, and Waves CEO Sasha Ivanov claimed that, in addition to the money involved, a platform can gain access to users, testers, and promoters through the ICO process.

Millar nodded his head in approval during Ivanov’s response to the question, in addition to noting that the technology has the potential to expand a project’s potential markets. However, Millar also stated, “This idea that [ICOs are] a radical globalization of the economy is just a falsehood.”