The spectacle of Bitcoin has largely overshadowed the development of the cryptocurrency’s underlying structure – the blockchain. The blockchain is a type of digital ledger that performs a number of traditional record-keeping functions in a more efficient and reliable manner. Organizations around the globe continue to invest heavily in blockchain technology for a myriad of purposes. To fund these innovative projects, many organizations hold an Initial Coin Offering (“ICO”) in which “tokens” -- a blockchain’s primary means of exchanging value, proving ownership, and/or paying for network services -- are sold to purchasers in exchange for U.S. dollars. In many ways, ICOs are the modern equivalent of a traditional initial public offering (“IPO”). Tokens are often bought as a financial investment, with purchasers hoping to capitalize on cryptocurrency mania and reap a large return. Indeed, some ICOs have exploited overzealous investors by holding fraudulent ICOs without any real intention of developing a functioning blockchain network. As a result, the Securities and Exchange Commission largely regulates ICOs in the same manner as IPOs, imposing stringent reporting requirements and liability on startups and developers. However, these bad apples are in the minority and moreover, certain tokens sold through ICOs do not meet the classic definition of a “security.” Utility tokens, in particular, are functionally distinct from a traditional security with any rise in value being incidental to the token’s primary utility. Treating all crypto-tokens sold through ICOs as securities stifles development by imposing onerous requirements upon novice developers. Current securities law exemptions are inadequate and given the popularity and success of many ICOs, their offerings should not be forced into poorly tailored regulations. The SEC should acknowledge the unique nature of certain blockchain tokens and provide tailored guidance for future ICOs if this burgeoning industry is to flourish.

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