SEC Chief: Not All ICOs Are Bad

Are all initial coin offerings (ICOs) bad? “Absolutely not,” according to SEC chairman Jay Clayton.

Clayton’s remark came during a talk on “Cryptocurrency and Initial Coin Offerings” at Princeton University Thursday, with that specific comment referencing his agency’s enforcement actions against the founders of projects that have run afoul of the U.S. securities laws his agency oversees.

The remark is notable given Clayton’s past statements, including his most famous, issued in February, in which he said that he believes “every ICO” he’s seen qualifies as a security. Indeed, Clayton, who testified before a U.S. Senate committee in February, opened the talk by telling the assembled students he believes that “distributed ledger technology has incredible promise for the financial industry.”

The SEC chairman went on to argue during the Thursday event that the steps taken by the agency in recent months could actually help the industry mature overall.

He told attendees:

“Is the approach taken in Washington by the SEC adversely affecting distributed ledger technology in other areas? My quick answer is that my hope is that it’s actually helping – because this technology is being used for fraud and to the extent that it’s being used for fraud, history shows that government comes down harshly on that technology later.”

Clayton continued: “I think if we don’t stop the fraudsters, there is a serious risk that the regulatory pendulum – the regulatory actions will be so severe that they will restrict the capacity of this new security.”

One of the issues with token sales, Clayton remarked, is the attempt to classify them as so-called “utility tokens,”
which would ostensibly free them from any kind of designation as a security – and, thus, put them out of the SEC’s reach. As such, he reiterated his view that almost all token sales purport to sell such products, despite the fact that they actually fit the description of securities.

If a startup is “offering something that depends on the efforts of others, it should be regulated as a security,” he told the gathering of students on Thursday.

Clayton used an analogy to describe the difference between a utility token and a security token.

“If I have a laundry token for washing my clothes, that’s not a security. But if I have a set of 10 laundry tokens and the laundromats are to be developed and those are offered to me as something I can use for the future and I’m buying them because I can sell them to next year’s incoming class, that’s a security,” he explained.

Still, he suggested that such a definition can evolve over time.

“What we find in the regulatory world [is that] the use of a laundry token evolves over time,” he continued. “The use can evolve toward or away from a security.”

Clayton later said that he sees the cryptocurrency space as one which will continue to evolve over time. Nations may experiment with sovereign cryptocurrencies, while startups might develop different kinds applications with the underlying technology, he added.

Whether a token qualifies as a security could also change as the industry evolves, he said, adding:

“Just because it’s a security today doesn’t mean it’ll be a security tomorrow, and vice-versa.”

Jay Clayton photo by Mahishan Gnanaseharan for CoinDesk

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