China bans initial coin offerings over concern about financial and social stability
Central bank says the unregulated fundraising method widely used by digital currency firms is illegal and fraudulent
China has banned the practice of initial coin offerings (ICOs) – fundraising by the issue of digital currencies outside the regulatory framework – and has stepped up its policing of the trading of digital coins to ward off financial risks and potential social disunity.
In a circular published on its website on Monday, the People’s Bank of China said fundraising schemes of this kind had been defined as illegal, and that 90 per cent of the ICOs launched on the mainland were found to have been fraudulent.
“Any form of fundraising through digital currency issuance should be halted immediately,” the central bank said. “Those schemes which are already launched should repatriate funds to investors,” it said in the circular, which also carried the endorsement of the securities and banking regulators and the task force under the State Council that is responsible for internet finance security.
The announcement came just a week after the National Internet Finance Association of China, a government-backed industry consortium, warned investors of fraud and illegal behaviour in such fundraising schemes.
Mainland financial regulators have been taking a harsh stance on internet currencies since the beginning of this year, concerned also about their impact on the yuan and as part of the Communist Party’s anti-corruption drive.
Bitcoin, the cryptocurrency, has proved particularly popular among mainland investors over the past year, resulting in capital outflows while ratcheting up pressure on Beijing to keep the local currency stable.
The central bank urged executives of the main bitcoin trading platforms at that time that they had to abide by the foreign-exchange rules as China stepped up efforts to curb money-laundering.
Purchases of the currency was one way corrupt officials used to illegally transfer their personal wealth outside the mainland, according to industry officials.
ICOs, which allow digital currency start-ups to raise funds through creating and selling digital “tokens”, have spread rapidly on the mainland this year. The issuer typically uses the money to invest in digital currency trading, which, if successful, pushes up the value of the tokens.
The Beijing Internet Finance Association estimated that 65 ICO transactions were completed in the first seven months of this year, netting a combined 2.6 billion yuan (US$398 million) of funds. More than 105,000 individual investors took part in the deals.
“Chinese investors have a penchant for chasing quick returns,” said Wang Feng, chairman of Shanghai-based financial services company Ye Lang Capital. “The regulators obviously aim to nip the problem in the bud.”
A Shanghai-based entrepreneur whose company issued an ICO earlier this year said the company was assessing the impact of the ban, whose severity was beyond its expectations.
“It is the most stringent measure China has taken to regulate internet currencies,” said Cao Yin, chief strategist at Energy Blockchain Labs. “Although the market is still waiting for the regulators to make clarifications on certain rules following the publication of the circular, it is certain that authorities are prepared to dealing a heavy blow to ICO issuers, investors and trading platforms to contain the rise of the cryptocurrency in China.”
Analysts said the ban would not be enough to entirely shut Chinese investors out of ICOs, since some of them could sidestep the regulations at home by taking part in offshore fundraising activities via the internet.