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

Having banned initial coin offerings (ICOs) outright on Monday, the Chinese central bank followed up by asking banks and payment companies to stop opening accounts for digital coin fundraising platforms and to restrict payments into and out of related individual accounts.

The People’s Bank of China said in a notice made public on Tuesday that banks and payment companies must search individual accounts related to cryptocurrency platforms and restrict any transactions in cases where large sums or frequent capital transfers are discovered. The aim is to ward off capital risks.

The notice, although issued from the central bank’s operations office that only regulates the Beijing market, gives specific implementation guidelines to the nationwide ban on the practice of initial coin offerings (ICOs).

On Monday, seven state regulators including the central bank and the top banking, securities and insurance watchdogs, jointly issued a circular aimed at cleaning up the increasingly popular but unregulated practice of fundraising through digital coins.

ICOs allow digital coin start-ups to raise funds by creating and selling digital tokens. The government declared such fundraising illegal and fraudulent.

“The checks on the banking and payment accounts of the platforms is one of the most effective ways to ward off capital risks,” said Shi Pengfeng, co-founder of wdzj.com, a website monitoring the internet finance industry. “If those [cryptocurrency] platforms dare to disobey the government ban, the authorities can curb their capital flow through regulations on banks and payment companies instead.”

The authorities may have learned from their previous experiences dealing with internet finance in taking such swift actions to nip ICOs in the bud. Such fundraising transactions can be easily manipulated for fraud purposes because to their low entry and widespread reach to public investors, said Shi.

ICOs have grown rapidly in China this year as companies raised a combined 2.62 billion yuan (US$398 million) from 65 offerings in the first half, according to a report from the Beijing Internet Finance Association. More than 100,000 investors put money in.

That compares with 145.2 billion yuan worth of conventional IPOs in China in the same period, involving 269 companies, according to data compiled by Bloomberg.

The latest ban on digital coins fundraising has been swift and effective, with most platforms followed the latest order, Shi noted.

For instance, Chinese ICO platform ICOINFO said in a notice on Tuesday that it has stopped all ICO services and is working with issuers of virtual tokens on its platform to repatriate funds to investors.

At least four projects had already returned funds to investors’ accounts and users are able to begin withdrawing funds, it said on its website on Tuesday, adding that more projects are finalising their fund returning plan.

There were already signs of tighter regulatory scrutiny before the complete ban introduced on Monday.

Last week, the National Internet Finance Association of China warned against the rise of ICOs, claiming they were disrupting the social and economic order and posing a risk to the financial system.