With last week’s SEC and CFTC senate hearing on bitcoin, blockchain, cryptocurrencies, and ICOs fresh in the industry’s collective mind, we thought we’d take some time to outline just a few of the repeating themes we see when it comes to Ethereum-based tokens and regulation.

SEC Chairman Jay Clayton: “I believe every ICO I’ve seen is a security.” Clayton noted at the end of 2017 that no ICOs had registered with the SEC. The SEC has warned investors that ICOs offer less investor protections than traditional securities markets, and so there are greater opportunities for fraud and manipulation. The SEC has cautioned that funds lost in an ICO may never be recovered. The “utility token” defense might not work. Chairman Clayton warned against using the phrase utility token. “…Merely calling a token a ‘utility’ token or structuring it to provide some utility does not prevent the token from being a security.” The SEC has cautioned that those who operate platforms that facilitate transactions in what are effectively “security tokens” may be operating as an unregistered exchange or broker-dealers, and thus in violation of the Securities Exchange Act of 1934. Chairman Clayton has said that securities lawyers, accountants and consultants need to focus on their responsibilities. Some ICOs are fine. Clayton gave an example of a book-of-the-month club to illustrate this point:

“For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.”

9. Ex-SEC lawyer Nicolas Morgan predicted there will be an “assembly line” for ICO enforcement in the future.

“You might be right that your ICO is not a security, and some judge, at the end of the day, may agree with you, but is it worth the expense and distraction to get that answer from a judge?”

He added: “It’s probably a better course of action if you’re anywhere close to being a security, to just assume that it is and go forward with that presumption in mind.”

10. Initial Coin Offerings are the past, Security Token Offerings (STOs) are the future. Simply calling your token a “utility token” doesn’t mean it’s not a security, and the vast majority of ICOs out there likely fall under the definition of a securities offering, as Chairman Clayton noted…

Enter Polymath.

In the future, token holders replace shareholders, and STOs replace ICOs.

The Polymath protocol ensures that only authorized investors who meet the criteria for each particular security offering are able to transact with that security token.

With this baked-in restriction, issuers can rest assured that their tokens will only be held by authorized participants.

Read the Polymath white paper today.