Private equity funds found to be investing in banned digital currencies offerings, says report

Beijing Bureau of Financial Work chief quoted on Sunday as saying some PE funds had been found taking part in ICOs outside the regulatory framework, and that the regulator would seek to weed them out

PUBLISHED : Monday, 04 December, 2017, 8:34am
UPDATED : Monday, 04 December, 2017, 9:32am

Beijing’s municipal financial regulator has warned private equity (PE) funds not to continue investing in initial coin offerings (ICOs), a practice banned by the mainland’s central bank three months ago.

Huo Xuewen, chief of the Beijing Bureau of Financial Work, said in a report published on Sunday that some of the funds had been found taking part in ICOs – fund-railings by the issuers of digital currencies such as bitcoin – outside the regulatory framework and he pointed out it was a wrongdoing that the regulator would seek to weed them out.

“Long term, those practices are misleading and wrong,” he was quoted by Securities Times as saying.

He added the authorities now plan to set up a strict monitoring system to track operations and investments by PE funds.

ICOs have become not only illegal fundraising schemes, but have caused damage to China’s foreign-exchange management system
Cao Yin, chief strategist at Energy Blockchain Labs

Huo did not reveal the names of the funds, nor did he mention the amounts involved.

China’s central government is taking a harsh stance on ICOs, part of its stepped-up efforts to clean up the financial technology (fintech) industry and control financial risk.

In early September, the People’s Bank of China announced any fundraising schemes via ICOs were defined as illegal after it found 90 per cent of those launched on the mainland were fraudulent.

“ICOs have become not only illegal fundraising schemes, but have caused damage to China’s foreign-exchange management system,” said Cao Yin, chief strategist at Energy Blockchain Labs.

“The illegal businesses have become rampant and it is understood that regulators will significantly tighten their oversight of the fund raisings.”

Some of the PE funds Huo referred to, include investment products registered with the Asset Management Association of China, a government-backed consortium of financial institutions.

At the end of September, more than 12,000 PE funds in China were registered.

Private PE fund managers and venture capitalists in China have been learning some tough lessons over the past two years after a rising number of their firms collapsed.

Despite the increasing penetration of digital businesses into the mainland market, dozens of start-up technology firms dealing with e-commerce, online-to-offline businesses and peer-to-peer lending, failed and faced liquidation.

China bans initial coin offerings over concern about financial and social stability

Many start-ups have been using the money they raised as subsidies to attract more online traffic from customers and to force out rivals, only to find that in reality that did now support a solid business model.

Private equity and venture capital investment in the telecommunications, media and technology sectors has dropped significantly as fund managers turned extremely cautious in their deal making.

“China’s private equity and venture capital industries are still short of experienced, high-calibre asset managers,” said Cao Hua, a partner at Unity Asset Management. “Some of them would just flock to any hot areas where returns turn out to be high.”

ICOs, which allow digital currency start-ups to raise funds through creating and selling digital “tokens”, was one of the hottest areas to attract massive capital inflow in the first seven months of this year.

The Beijing internet Finance Association estimated 65 ICO transactions were completed in the period, netting a combined 2.6 billion yuan (US$394 million) in funding.

Purchases of the digital currencies was also discovered to be one way corrupt officials were using to illegally transfer their personal wealth outside the mainland, according to industry officials.