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Canada Pours Cold Water on 'Initial Coin Offerings'

The Toronto skyline. Roberto Machado Noa—LightRocket, via Getty Images

Following in the footsteps of the United States and Singapore, Canada has become the latest place to yank away the welcome mat for so-called “ICOs.” In a notice last week, regulators there warned that the “coins” in “Initial Coin Offerings”—a popular new way for companies to raise money using cryptocurrency—are likely to be securities.

The move is hardly a surprise given the recent mania that has seen companies use ICOs (also known as token sales) raise tens or even hundreds of millions of dollars even though, in many cases, their business consists of little more than grand ambitions and a white paper.

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This is what led the Canadian Securities Administrators to warn that ICOs, which in some cases let people use credit cards to buy “coins” on a website, can be used to exploit investors. While acknowledging that ICOs can provide new opportunities to raise capital, the regulator stated:

Cryptocurrency offerings can ... also raise investor protection concerns, due to issues around volatility, transparency, valuation, custody and liquidity, as well as the use of unregulated cryptocurrency exchanges. Also, investors may be harmed by unethical practices or illegal schemes.

The CSA also noted that digital currency offerings would in many cases be considered securities or derivatives, meaning they’re subject to a variety of rules that dictate how and when they can be subject to the public.

The Canadian notice comes a month after the SEC ruled that one high profile ICO, which last year raised $150 million to pursue an automated investment strategy, was in fact a securities offering. The SEC also set out guidelines to help companies understand the circumstances when token offerings will fall under its regulatory regime.

According to Robert Crea, a CFA who is also a lawyer at the firm K&L Gates, there is a push among regulators worldwide to clamp down on ICO activity.

“We appear to be seeing a coalescing of opinion by international regulators on the securities implications for certain digital token issuers and the intermediaries for token offerings. Regulators appear particularly concerned about fraud, money laundering, cybersecurity risks, insufficient disclosure, and general violations of securities laws,” said Crea in an email to Fortune.

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Crea added that he expects to see law enforcement action and private litigation over ICOs in the near future.

No slowdown so far?

In its notice, the Canadian agency also warned cryptocurrency exchanges, where the tokens created in an ICO can be exchanged for popular cryptocurrencies like bitcoin or Ethereum, that their business could fall within the ambit of securities trading.

The CSA added that companies planning to engage in an ICO could stay onside of securities law by creating a prospectus and by limiting the sale to accredited investors.

It’s unclear, however, how much the recent regulatory warnings will cool the ICO market. As the New York Times reported earlier this month, dozens of companies have gone forward with ICOs despite the SEC’s cautionary warning.

Some proponents of ICOs argue that the offerings are not securities because recipients can use the tokens they receive to participate in online activities, such as obtaining cloud computing storage or using a smart contract network. In this view, the token buyers are simply purchasing a service. Skeptics, however, point to the robust secondary market for the tokens to argue the tokens resemble shares of a company’s stock.

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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