With a blanket ban on initial coin offerings, China has sidestepped an issue plaguing regulators worldwide: are such tokens securities?

A cross between crowdfunding and an initial public offering, ICOs -- which have raised at least $1.25 billion globally so far -- are the sale of tokens based on the blockchain, the technology underlying bitcoin. While they at least ostensibly promise the holder access to the final product, making them more like vouchers, the problem for regulators is they also often bear the characteristics of regulated securities, especially when buyers are betting on capital gains.

So far, regulators in most major markets haven’t taken actions as drastic as China, whose ban on ICOs spurred selloffs across bitcoin and ethereum. The U.S. said in July ICO issuers must adhere to federal securities law, while Singapore and Hong Kong have also said they will regulate such sales if the tokens constitute securities. The latter said in a statement on Tuesday that ICOs bear risks of fraud and money laundering.

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“Most of them are going to fall back on whatever they have released on what constitutes securities,” said Arthur Hayes, founder of cryptocurrency exchange BitMEX in Hong Kong. “You’ll have a lot of people falling back on what they’ve said previously as opposed to trying to come up with regulations for an industry they have absolutely no clue on.”

Most cryptocurrencies slid amid increasing signs of a crackdown by China, according to data from CoinMarketCap. Ethereum -- whose blockchain is the basis of most token sales -- has plunged 18 percent over the past week, while NEO, which boasts China’s first open source blockchain, lost 40 percent.

While the U.S. Securities and Exchange Commission declined to bring charges in one high-profile case of digital assets stolen by hackers, it did note that the DAO tokens were securities. Canada published a notice in August with more detailed guidelines on the applicability of securities laws, noting that many cryptocurrency offerings involve sale of securities. As regulators show increased interest in ICOs, some sales have started to exclude investors in certain jurisdictions such as the U.S.

“We believe more advanced economies with robust legal systems and mature financial regulation will follow the example of Canada and release some explicit guidelines for token sales,” said Aurelien Menant, Hong Kong-based chief executive officer of Gatecoin Ltd., which runs a token exchange and advises ICOs. “Specifically, this means clarifying whether token sales are subject to existing securities regulation and if so what processes are required to comply accordingly or apply for exemptions.”

To avoid running afoul of the law, ICO issuers should establish a clear link between the rights attached to a token and its usage and performance on the blockchain platform, said Padraig Walsh, partner at law firm Bird & Bird in Hong Kong, who advises on ICOs. Companies can also impose a lock-up period during which the tokens can’t be exchanged, or they can ban conversion entirely.

“It is about the token representing the ability to operate on the blockchain platform that’s being developed, so it’s less about giving a direct rate of return,” he said. “Once you’ve got that embedded speculative gain element to it, you’re at risk.”

There are many remaining questions in ICO regulation: who will be liable in case of any violations and what will happen to past ICOs? Regulating token sales is also especially difficult since investors can easily buy digital currencies and use them to invest in ICOs and issuers can simply mount a website to start a sale, BitMEX’s Hayes said. What China’s ban might do is curb high-profile marketing and downsize upcoming ICOs, he added.

China has never shied away from drastic interventions in markets, whether it’s in stocks, currency or digital assets, especially given speculation tends to be more extreme there. Bitcoin trading plunged earlier this year after the biggest Chinese exchanges started charging transaction fees, following warnings and inspections by the central bank. For the nation, digital currencies are a particularly thorny problem, since they can be used to circumvent capital controls.

To the cryptocurrency world, the silver lining is that increased -- but not draconian -- regulation of ICOs might mean more legal clarity in the future.

The consistent message from regulators “boils down to three things -- calling a spade a spade, addressing systemic risk and protecting the public,” said Urszula McCormack, a Hong Kong-based partner at King & Wood Mallesons, a law firm that has advised blockchain projects. “Market hype always contracts when there is regulatory focus. That is a sign of a maturing market.”

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