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September 5, 2017

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China bans fundraising through ICOs

CHINA has banned individuals and organizations raising funds through initial coin offerings (ICOs), a form of fundraising in which technology startups issue their own digital coins, or “tokens,” to investors to access funds.

The People’s Bank of China, the securities and banking regulators and other government departments said in a statement yesterday: “ICOs, in essence, are a kind of unauthorized and illegal public fundraising, which is suspected of being related to criminal activities such as financial fraud and pyramid schemes.”

Individuals and organizations that have completed ICO fundraising should make arrangements to return funds to investors, the statement said.

Digital currencies, including Bitcoin and Ethereum, tumbled yesterday after the statement was issued.

Bitcoin dropped 10 percent to around 27,000 yuan (US$4,138) while other “virtual coins” fell up to 50 percent, compared with the previous trading day.

In China, ICOs are usually used by startups to bypass the regulated fundraising process required by venture capitalists and banks.

“Most ICO investors don’t know investment risk or have related professional knowledge, making the investment like gambling,” said Ma Xiao, an analyst with Rong360, a third-party online finance platform.

Some investors, who declined to be identified, said ICO trading was “like a dream with higher profit compared to a drug deal.”

In the first half of this year, ICO projects raised 2.61 billion yuan from 105,000 investors, said a state-level online finance risk analysis platform under the National Computer Network Emergency Response and Coordination Center.

Though the boom helped tech companies access much needed funds for development, it also created fertile ground for scammers looking to take money from ignorant investors under the guise of ICOs, which could threaten the country’s financial stability if left unchecked, Xinhua news agency reported.

“From the perspective of issuers, investors and the market, ICOs have their risks,” deputy head of Renmin University of China Law School Yang Dong told China Financial News, a news outlet of the central bank.

Analysts have advised that regulation of ICOs should focus on registration of financial products, proper information disclosure and underlying project quality.

Governments in other countries have taken note of the risks.

In a notice on August 28, the US Securities and Exchange Commission warned investors about potential scams involving stocks of companies claiming a relationship to or engagement with ICOs.

China’s latest regulation came as authorities repeatedly highlighted the importance of containing financial risk as the country faces a build-up of debt, and booming new financial products challenge regulations.

Since China’s tone-setting economic conference last December pledged to make preventing financial risk a priority, regulators from the banking, securities and insurance sectors have made solid efforts to clean up the market.

The booming ICO trade fueled the price of digital currencies including Bitcoin, Ethereum and many newly invented “coins,” whose market value surged several times.

Regulators had already applied the brakes to the heated ICO market. Around 60 ICO trading platforms were inspected and asked to halt ICO business since last week, according to media reports.

Major platforms, including ICOAge and BTCChina, have stopped offering ICO trading.

Unlike IPOs, in which investors buy stocks in companies, investors in ICOs receive digital coins developed by the firms, which could appreciate in value if the companies fare well and demand for their currencies grows.

ICOs, once a game confined to a few, have taken off this year in China, attracting more players — both innovators and scammers — and catching the attention of regulators.

Reaction was swift online, Reuters reported.

“The music has stopped,” said one member of a WeChat group set up last week for an upcoming ICO for a fundraising platform called SelfSell.

“Hurry up and sell your Bitcoin,” said another.

The organizer of the ICO project said it had been suspended.


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