Regulators are about to begin scrutinizing China’s initial coin offerings, an industry worth hundreds of millions of dollars.
Local outlet Caixin reported that a notice, issued by a working committee that oversees risk in the country’s internet finance sector, said new projects raising cash or other virtual currencies through cryptocurrencies will be banned. It added that authorities will crack down on related fraudulent practices.
The document defined initial coin offerings (ICOs) as an unauthorized fundraising tool that may involve financial scams, the Caixin report noted. The committee provided a list of 60 major ICO platforms for local financial regulatory bodies to inspect.
Seven government administrations including the People’s Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission issued a joint statement where they reiterated that ICOs are unauthorized illegal fund raising activity.
The statement said authorities are banning all organizations and individuals from raising funds through ICO activities and that all banks and financial institutions should not do any business related to ICO trading.
Organizations and individuals that have completed fundraising through ICOs should make relevant arrangement to return funds, in order to protect the interests of investors and properly deal with risks.
The statement added that enhanced management is needed on digital coin fundraising platforms.
Bitcoin’s price fell more than 5 percent on Monday to about $4,376.42, according to Coindesk data, following the news about the crackdown. Ethereum, widely considered the bigger beneficiary of the ICO boom of the two, was down more than 12 percent.
ICOs have become a primary means of fundraising for projects built on blockchain technology. Companies create and issue digital tokens that can be used to pay for goods and services on their platform or stashed away as an investment. They put out whitepapers describing the platform, software or product they’re trying to build, and then people buy those tokens using widely-accepted cryptocurrencies like bitcoin or ethereum.
Start-ups around the world have raised more than a billion dollars this year in coin sales. In China, ICOs have raised at least 2.62 billion yuan (about $400 million), Reuters reported, citing local media.
Some Chinese ICO platforms have already halted their services. ICOINFO said on its website that it was voluntarily temporarily suspending “all ICO-related functionality on the site” until it received clarity on the shifting regulatory environment.
BTCC, a Shanghai-based bitcoin exchange platform, said it halted trading of ICOCOIN over the weekend. Its CEO, Bobby Lee, told CNBC in July that cryptocurrencies need to be regulated or they risk going out of control as more people invest into those digital assets.
Caixin further reported that authorities shut down a blockchain conference over the weekend, citing concerns over ICOs being used to raise funds illegally.
Last week, China’s National Internet Finance Association warned ICO investors to be wary of fraud and urged them to report any suspected crimes to the police.
Part of the appeal of ICOs, beyond speculation on the growth of new assets, is that early-stage start-ups can use them to raise large sums of money without receiving the same kind of scrutiny that they might when approaching venture capital investors.
China is not the first country to look into potential regulatory oversight in this booming space. Regulators in the United States and Singapore have highlighted the risks of money laundering and fraud that investors face when buying into a digital token sale. But experts have warned that regulators need to understand the space better so as not to stifle innovation.