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China central bank declares initial coin offerings illegal

China’s government has declared that initial coin offerings are illegal and called a halt to fundraising involving virtual coins, in the latest move to curb risks from unregulated areas of the financial system.

ICOs are “essentially a form of unapproved illegal public financing behaviour” that also “raise suspicions” of illegal securities issuance, financial fraud, and other “criminal activity”, a group of seven agencies led by the central bank announced on Monday. 

Bitcoin, the best known cryptocurrency, saw its price fall 9 per cent to $4,437 on Monday as traders absorbed the news from Beijing.

Chinese ICO activity had accelerated in recent months, with Rmb5bn ($766m) in fundraising in July and August, according to figures cited by the official Shanghai Securities News. But Monday’s notice called for an immediate halt to all fundraising. 

Xi Jinping, China’s president, has declared “financial security” a top priority for this year, as the Communist party prepares for a once-in-five-years leadership transition scheduled for next month. 

The People’s Bank of China (PBoC), the securities regulator and other agencies said they had completed an investigation of ICOs and will strictly punish both past and future violations. It added that proceeds from completed ICOs should be refunded to investors. 

But some argue that determined Chinese investors will still find ways to buy.

“This doesn’t actually change much. Chinese investors will still be able to invest in (ICOs) if they really want, just through overseas platforms,” said Zennon Kapron, principal at Kapronasia, a Shanghai-based fintech consultancy. “Certainly we will not see Chinese entities marketing ICOs to mainland investors, but there’s nothing to stop an overseas legal entity or platform from having a Chinese version of their website.” 

Beijing’s crackdown on ICOs began last week, when the state-controlled National Internet Finance Association warned investors that such fundraising had “thrown the social economy into disorder” and was rife with fraud. 

The US Securities and Exchange Commission warned in late July that ICOs were skirting securities and issued another notice last week about “potential scams”. 

While authorities are concerned about speculation and fraud, ICO proponents say they offer a faster, less expensive alternative to initial public offerings or venture capital. 

“ICOs are a valuable and innovative financing method. They can solve a lot of shortcomings with traditional financing and trading methods,” said Sun Xixuan, a self-described ICO angel investor. “There are a lot of projects that are just grabbing cash, but there are also a lot that have real value.” 

Chinese authorities have repeatedly sought to rein in speculation related to cryptocurrency. In 2013, the PBoC banned banks from handling bitcoin transactions. 

In February, major Chinese bitcoin exchanges temporarily halted withdrawals of the virtual currency after the PBoC ordered them to tighten enforcement of regulations related to money laundering and capital flight

In a testament to the impact of that crackdown, only 18 per cent of bitcoin transactions occurred on renminbi-denominated exchanges over the past six months, down from 98 per cent in the six months to early January, according to data from bitcoinity.org.

Additional reporting by Nan Ma

Twitter: @gabewildau