China’s ban on ‘wild west’ digital fundraising gets thumbs up from unlikely quarter: coin investors

Concerns the market for ICOs was descending into fraud were behind the central bank’s decision to shut it down, with even market participants saying that a cooling-off would be good

PUBLISHED : Thursday, 07 September, 2017, 8:00pm
UPDATED : Thursday, 07 September, 2017, 11:05pm

For digital currency investor Lin Jiapeng, the Chinese central bank’s sudden ban this week on initial coin offerings (ICOs) was “effective and timely”, even though it meant a loss of business for his firm.

“It’s a nice catch by Chinese regulators to rein in the bubble,” said Lin, founder of Link Capital, a Shenzhen-headquartered venture capital firm specialising in financial technology, digital currency and blockchain investments.

The People’s Bank of China (PBOC) declared the digital fundraising schemes illegal, a move that was prompted, it said, by concerns over financial stability and the potential for social unrest if the schemes turned out to lose money for investors.

In a country notorious for “get rich quick” investments that are often little more than scams, the central bank may have decided to ban ICOs to prevent any problems and give itself time to work out how to regulate them.

“The amount of funds raised from ICOs has been small so far, so we can’t say the ban is preventing a financial disaster, but they were indeed getting a bit wild west,” said Richard Jerram, chief economist at the Bank of Singapore.

He added that the ban may also be part of a broader crackdown on capital outflows that Beijing has been pursuing for some months, as ICOs could potentially provide a means for people to take money out of China.

What is an ICO, and why is China’s central bank banning it?

In an ICO, companies – typically those looking to become digital currency traders – issue virtual currency tokens to investors to raise funds. If the business succeeds, the investors gain from an increase in the value of the tokens. But the practice is unregulated, and investors have no underlying security, like a bond for example, to fall back on if the platform does not succeed.

A combined 2.6 billion yuan (US$398 million) was invested in as many as 65 ICOs in China in the first seven months of 2017, according to the Beijing Internet Finance Association. But according to the central bank, a startling 90 per cent of them may have been fraudulent.

Some of the schemes themselves have added to this perception by using fanciful names or suggestive images – the website of one ICO issuer, NMB, is adorned with pictures of scantily clad young women. But ICOs had attracted a large pool of investors, from financial professionals to chicken farmers and even groups of elderly square dancing enthusiasts, drawn by the idea of a fast buck.

But after the ban was announced on Monday, the market fell silent, digital currency trading platforms closed, projects were scrapped and forums and conferences on digital currencies cancelled or postponed. Even some of the investors’ group chat rooms vanished.

On Thursday, NEO, China’s 12th largest cryptocurrency platform by market value, said in a statement on its website that it would refund investors in its ICO fully, while a day before, Yunbi, another popular trading platform, said it would wind up trading of 13 digital currencies, including OMG and QTUM.

Investors in ICOs who spoke to the Post said that even though they had lost their investments, the ban was necessary.

An online shop owner in the southeastern city of Xiamen, who gave only his surname Xia, said his perception of ICOs had changed since he was first exposed to the concept in 2013 as a 19-year-old.

“At first, I really believed I was investing in blockchain technologies and other promising projects, but gradually all I wanted was to sell once they were tradeable on the secondary market.”

Xia said he was also disturbed by the dubious use of the capital raised. “One famous issuer once planned to raise over 1 billion yuan, but where and how he would invest the money was not clear. There were other ICOs which pooled funds in exchange for their tokens but the purpose of their offerings was just to launch another token,” he said.

Hong Kong regulator trains sights on digital currency fundraising a day after China bans it

Shi Jianglong, another investor, who works in Shenzhen in a company providing blockchain technology services to corporate clients, said he thought some of his friends were now too embarrassed to admit they had invested in ICOs.

“I would study the issuer and their offer documents, and discuss the project’s feasibility before investing, while most investors wouldn’t or couldn’t do that,” he said.

He believed that the PBOC’s estimate that 90 per cent of ICOs were fraudulent could be an underestimate.

However, other investors said an outright ban may not have been the only approach the PBOC could have taken.

“It’s the right thing to regulate, but the PBOC can’t hammer the life out of innovation,” said an investor surnamed He from Anshan city in northeastern Liaoning province. “They need to reflect on why China can’t develop a globally received cryptocurrency like bitcoin,” he said.

He added that the central bank had been encouraging blockchain technologies, but the ban could damage that.

“Regulators could have set up thresholds allowing eligible investors to participate in the offerings, while tightening registration requirements for issuers,” he said.

China follows ban on digital coin offerings with order to banks to stop opening accounts for virtual fundraisers

Another expert said that it was the mania surrounding ICOs that killed them.

“Had ICOs grown moderately in China, the authorities’ approach would have been softer and there would have been ways to foster blockchain innovation,” said Huang Zhen, a financial law professor at China’s Central University of Finance and Economics.

Nonetheless, the ban was necessary, he said.

“The market could derail without the ban. An orderly exit would keep investors from [protesting in ] the streets, social unrest would be the last thing the PBOC wants to see.”

Additional reporting by Karen Yeung