A Test for the Market in Initial Coin Offerings

The ballooning market for so-called initial coin offerings — which has boomed to $1.3 billion so far this year — just got a reality check.

The Securities and Exchange Commission has decided that the largest sale of cryptocurrency tokens last year, reminiscent of an initial public offering of shares, was indeed a sale of securities and should have complied with United States laws governing the process and protecting investors.

This time, the regulator is letting off the hook the blockchain experts behind the Decentralized Autonomous Organization, which raised $150 million in ether, the digital currency of the Ethereum platform. But the Wall Street watchdog’s report, released on Tuesday, sends a strong signal to the initial coin offering market and should deflate what was looking like an issuance bubble.

The regulator did not announce a broad crackdown, but it made clear that when coin offerings are similar enough to securities offerings, they fall under registration, disclosure and other requirements that apply to stock and bond issues. The D.A.O. episode had a particular twist in that more than a third of the proceeds was stolen by hackers, but that is largely beside the point. As well as alerting issuers about regulations, the commission warned investors to be wary.

Coin practitioners had been awaiting an official ruling. The regulator’s report will surely crimp the market for a time. But much remains uncertain. It may be that blockchain start-ups needing funds will find that, with the additional red tape, coin offerings do not provide much, if any, advantage over crowdfunding, venture capital or even traditional initial public offerings of stock.

On the other hand, the technology surrounding cryptocurrencies is potentially powerful, and even for funding purposes it may have certain advantages over cash. The test for those who believe in it will be in turning a questionable fund-raising market into one that is both legitimate and useful.


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