During a Congressional hearing last month, SEC Chairman Jay Clayton said all ICO tokens he had seen were securities. That remark, with all its attendant implications, has spooked investors and snowballed into a series of actions that might end up radically reshaping cryptocurrency markets.

Since Clayton’s remark, the SEC has tightened the screws on coin offerings and exchanges. Just last week, the agency threatened to bring cryptocurrency exchanges under its purview. It has asked hedge funds to disclose their methods of valuing coins for their funds and, according to Bloomberg, also sent subpoena notices to some funds.

At the crux of these actions by the SEC is the question of whether ethereum tokens are securities. The Howey test, which is used by the SEC to define security, uses four criteria – investment of money, common enterprise, expectation of profit, majority of work being performed by third parties. During its offering in 2014, ethereum marketed ether as a product and “NOT a security or investment offering” (emphasis from the original document). Several ICOs have since gone down the same route and sold their coins as utility tokens or coins that are transacted within a closed network to achieve specific goals.

For example, Dentacoin is a coin that aims to remove insurance companies from the patient and doctor relationship by enabling direct transaction. This means that it could be classified as a utility token. But transactions within its network would not make economic sense if it did not have fungibility (or, the property of being exchanged for other cryptocurrencies or fiat currencies), a security token characteristic. It is also listed on cryptocurrency exchanges where its value is subject to the same ebbs and flows as other coins. Besides, investors in its tokens did so with an expectation of profit. They (correctly) calculated that the price of their tokens would appreciate with time.

That increase in value has also helped fund development of the cryptocurrency ecosystem. When I last spoke to Dash CEO Ryan Taylor, he told me that the increase in Dash’s price has helped the executive team’s need to request additional funds for development.

A parsing of legal terminology is also involved here. This blogpost does an excellent job of unpacking it. Briefly, ethereum’s initial offering was an investment contract even though it was not marketed as one.

As happens in most cases involving easy money, the coin offerings ecosystem has also attracted unscrupulous characters. They have been or are being weeded out of the system.

What Happens If The SEC Imposes Regulation?  

There will be an array of changes in the way ICOs are conducted. Here are a couple.

For starters, greater scrutiny might force ICO issuers to outline more information related to the project. In addition to the project details, documents that provide risks and disclosures in greater detail will become necessary. Currently, only a white paper, which details business plans in a cursory manner, is required to formally explain the project. Details about a particular project’s finances and its originators are few. As a result, it has become relatively easy to hold an offering.

The addition of details will bring in more professionals to the process and make ICO costs more expensive. It could also lengthen the time required to prepare for an ICO. Some of that is already happening. According to a report released by research firm Tokendata earlier this year, the average duration to prepare for an ICO has jumped from a month to three months due to the additional pre-sale placement of funds that is a result of increased scrutiny from regulators.