On Tuesday, Feb. 6, Securities and Exchange Commission (SEC) chair Jay Clayton and Commodity Futures Trading Commission (CFTC) chair J. Christopher Giancarlo testified before the Senate's Banking, Housing and Urban Affairs committee. The hearing generally led to relief in cryptocurrency markets: bitcoin, which dipped below $6,000 around 12:00 p.m. EST Tuesday, has rallied to $8,200 at the time of writing (Feb. 8 at 11:30 EST).

While the regulators' message was in some ways accommodating, however, they expressed deep skepticism regarding initial coin offerings (ICOs): "We owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one," said Giancarlo, "and yet we must crack down hard on those who try to abuse their enthusiasm with fraud and manipulation."

Every ICO Is a Security

Clayton made it clear who would be on the receiving end of such a crackdown: "I believe that every ICO I have seen is a security," he said. Since most companies holding ICOs proceed as though federal securities law did not exist, that statement all but assures that the agency will cut a swath through the token market. It's already issued one cease and desist order, to the "decentralized Blockchain​ ​based​ ​food review/rating​ ​social​ ​media platform" Munchee. (See also, ICOs: Beginning of the End?)

A distinction appears to be emerging. Decentralized cryptocurrencies such as bitcoin and ethereum are relatively safe from securities registration requirements, as Clayton implied in an interview with the Wall Street Journal in November: "When you depart from the bitcoin or the ethereum, and you get into the tokens, the hallmarks become pretty clear." (See also, Securities Industry Regulations.)

What About Ethereum?

The only problem is, this distinction does not make sense. "It is not at all clear to us how 'all ICOs are securities' and Ethereum is not," Matthew Gertler, senior analyst and counsel at Digital Asset Research, wrote in a client note analyzing Clayton's Senate testimony. Ethereum, after all, "conducted a token sale in 2014."

Speaking at Yahoo Finance's All Markets Summit: Crypto conference in New York City on Feb. 7, Tetras Capital partner Alex Sunnarborg raised the same question: if all ICOs are securities, what does that mean for ethereum? (See also, "Bitcoin Is the Alpha and the Omega": CoinDesk Research Director.)

Gertler's note hints that the apparent contradiction in Clayton's statements could arise from a limited understanding of cryptocurrencies, "given a question that Clayton was unwilling to give a direct answer to: 'Do you have the technologists, computer experts who can begin to understand how these virtual currencies work?'" Clayton's answer, the note says, "focused on the agency's strong economists."

Don't Call It an ICO

To be sure, there is some logic to the legal distinction Clayton makes between ICOs and bitcoin. All bitcoin in existence was mined, as Gertler pointed out in an earlier interview, so there was never an initial investment of money – a key element of the Howey test that federal regulators use to determine whether a given instrument falls under securities regulation. All bitcoin trading occurs on the secondary market.

In any case, what would a SEC enforcement action against bitcoin look like? Would they issue a cease and desist letter to the miners? To Satoshi?

Ethereum's case is different: the initial crowdsale was conducted from July to September 2014, raising an estimated $18.4 million worth of bitcoin. No one was calling it an ICO yet, but in retrospect that's what it appears to have been. Judging by earlier comments, Clayton doesn't wish to lump ethereum in with Munchee tokens, but his recent testimony raised more questions than it answered.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not have a position in any cryptocurrencies.