China bans initial coin offerings as illegal fund-raising

Regulatory challenge could affect tens of thousands of cryptocurrency investors

SHANGHAI/BEIJING • China yesterday banned individuals and organisations from raising funds through initial coin offerings (ICO), or launches of digital currencies, saying the practice constituted illegal fund-raising.

The crackdown is the strongest regulatory challenge so far to the burgeoning market for digital token sales, and could ripple out to affect tens of thousands of cryptocurrency investors who had participated in at least 65 projects by mid-July.

ICOs have become a bonanza for digital currency entrepreneurs, globally and in China, allowing them to raise large sums quickly by creating and selling digital "tokens" with little or no regulatory oversight.

Individuals and organisations that have completed ICO fund-raisings should make arrangements to return funds, said a joint statement from the People's Bank of China, the securities and banking regulators and other government departments, that was posted on the central bank's website.

Bitcoin tumbled 7.2 per cent, the most since July on a closing basis, to US$4,530.73. The ethereum cryptocurrency was down more than 6 per cent yesterday, according to data from Coindesk.

Mr Zennon Kapron, director of the financial technology consultancy Kapronasia, said he suspected regulators were putting the brakes on ICOs in order to better understand the phenomenon but could ease off in the future.

"Regulators globally are struggling to understand what ICOs are, what the risks are, and how to ring-fence and regulate them," he said. "China... is no different than the US or Singapore in saying 'we need to push back on these for now until we figure out how to deal with them...'"

ICOs have become a bonanza for digital currency entrepreneurs, globally and in China, allowing them to raise large sums quickly by creating and selling digital "tokens" with little or no regulatory oversight.

A cross between crowdfunding and an initial public offering, ICOs involve the sale of virtual coins. But unlike a traditional IPO in which buyers get shares, getting behind a start-up's ICO nets virtual tokens unique to the issuing company or its network. They grow in value only if the start-up's business or network proves viable, attracting more people and boosting liquidity.

There are 43 ICO platforms in China, with almost 60 per cent located in Guangdong, Shanghai and Beijing, the National Committee of Experts on the Internet Financial Security Technology said in a July report.

The venues had raised 2.6 billion yuan (S$540.6 million) from 105,000 investors as of July 18.

Icoage, Icoinfo and Ico365 are the three largest platforms by financing, and held a combined 64 per cent share. Icoinfo said it voluntarily suspended all ICOs to prevent risks last week.

Reaction was swift online. "The music has stopped," said one member of a chat group on the social networking platform WeChat that was set up last week for an upcoming ICO for a fund-raising platform called SelfSell. "Hurry up and sell your bitcoin," said another.

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 05, 2017, with the headline 'China bans initial coin offerings as illegal fund-raising'. Print Edition | Subscribe