By Jeff John Roberts
December 12, 2017

The Chairman of the Securities and Exchange Commission, Jay Clayton, issued a fresh warning shot on Monday about cryptocurrencies like bitcoin and companies’ use of “initial coin offerings” (ICOs) to sell digital tokens to the public.

“There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, ‘this time is different,'” said Clayton in a statement, which went on to warn crypto investors—and especially those selling tokens and services to them—to watch their step.

The statement is the latest sign the SEC is in the midst of cracking down on the white-hot crypto market, but the news isn’t all bad for the sector: Clayton’s words also suggested the agency recognizes digital tokens as an important financial innovation. Here are five important takeaways, including key quotes, from his message.

Investors Are Being Ripped Off in ICOs

This will comes as no surprise to anyone who has been following the ICO market, which involves companies raising money by selling digital tokens for online services. Last week, for instance, the SEC filed charges against a site called PlexCoin that swindled $15 million dollars from investors while promising 13-fold returns.

In a section of his statement dedicated to “Main Street Investors,” Clayton noted that no ICOs have been registered with the SEC, and referred to a series of questions investors should ask before handing over any money. He also warned:

[T]here is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation. … [T]hese markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge.

Terms Like “Utility Token” and “Blockchain” Won’t Stop SEC Scrutiny

When it became clear earlier this year that the SEC was looking at ICOs, some companies rushed to define their offering as “utility tokens.” The term implies that the token for sale will be used to purchase a service (much like a subway token in the physical world), and so it’s not a security that needs to be registered.

Clayton, however, warns against companies using “utility token” as a fig-leaf when what they’re really selling is a speculative investment. Likewise, the term “blockchain” will not serve as a magic bullet against scrutiny. Here are are two key quotes (emphasis ours):

…market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.

Said another way, replacing a traditional corporate interest recorded in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction, but it does not change the substance.

The SEC Is Also Watching Crypto Brokers and Lawyers

Clayton’s statement is notable for the extent to which his warnings are not directed only at companies selling tokens, but the professional infrastructure supporting them—securities lawyers, consultants, broker-dealers, and so on (emphasis ours):

I also caution those who operate systems and platforms that effect or facilitate transactions in these products that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934 …

…where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities.

Such statements may reflect an effort by Clayton to push back against lawyers and financial professionals who have created optimistic frameworks (including the so-called SAFT framework) to make the case that many ICOs are legal.

Some ICOs Are O.K.: The “Book Club” Example

While the overall tone of Clayton’s missive is stern, the SEC Chair also makes clear he does not regard all digital tokens are securities. In a compelling example, he explains how it could be acceptable for a company to raise money though an ICO for a book-of-the-month club (emphasis ours):

A key question for all ICO market participants: “Is the coin or token a security?” As securities law practitioners know well, the answer depends on the facts. 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.

Clayton quickly expands his example, though, to say most ICOs are like companies raising money for yet-to-be-build publishing houses, and that people are not really buying the tokens to get books—but instead to resell for profit. Nonetheless, the book-of-the-month club example shows the SEC Chair is not entirely down on ICOs.

Crypto Insiders Are Taking It in Stride

Longtime cryptocurrency boosters reacted to Clayton’s statement on social media and in news outlets and, overall, their response was decidedly neutral. Unlike earlier actions by regulators—most notably the decision by New York authorities to impose a so-called “BitLicense” for bitcoin in 2015—few portrayed the SEC Chair’s as an existential threat.

Lawyer Marco Santori, a well-known figure in the cryptocurrency world, even treated the statement as welcome news, in part because it did not draw bright lines to forbid ICOs:

 

This is part of Fortune’s new initiative, The Ledger, a trusted news source at the intersection of tech and finance. For more on The Ledger, click here.

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