Chinese regulators are preparing to begin a new campaign with the aim of placing the country’s initial coin offerings (ICOs) under high scrutiny by officials to prevent fraud and illegal fundraising.
What is an ICO and how does it work?
An initial coin offering is essentially an unregulated way to raise funds for a new cryptocurrency venture. Through this process, startups and organisations are able to bypass the rigorous and highly regulated process through which banks and venture capitalists raise capital. During an ICO campaign, a percentage of a new cryptocurrency is sold to early backers in exchange for either cash or other more well-established cryptocurrencies with Bitcoin being a popular favorite.
Generally when a cryptocurrency firm tries to raised money through an ICO, it creates a whiteplan that explains the project in detail as well as how much money is required for the project and what the company will fulfill upon completion. During the campaign itself, enthusiasts and supports of the company will buy a number of cryptocoins from the firm that are often referred to as tokens which function in a similar way to shares in an initial public offering.
If the ICO is successful, these funds will be used to launch the new cryptocurrency. However if it fails these funds will likely be returned to the backers but that is now always the case which is why China and other governments are now highly considering how to regulate these transactions.
Crackdown on ICOs in China
The Chinese financial news site Caixin (in Chinese) first reported on a notice issued by a government committee that oversees potential signs of risk in the country’s internet finance sector.
The document explicitly stated that any new projects that raised cash or virtual currencies through the use of cryptocurrencies would be outright banned. Local authorities will also crack down on any fraudulent practices related to ICOs.
Caixin’s report on the notice defined initial coin offerings as an unauthorized fundraising tool that could possibly involve financial scams such as pyramid schemes and even other types of criminal activities.
So far a list of 60 of China’s major ICO platforms has been compiled and local financial regulatory bodies are preparing to inspect them all for fraudulent activity.
Seven government administrations including the People’s bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission have all come together to issue a joint statement echoing the committee’s stance on how ICOs are a form of unauthorised illegal fund raising.
According to the statement, all organisations and individuals are now prohibited from raising funds through any ICO activities. Those that have already done so though, should make the arrangements necessary to return the funds they raised in order to protect their investors.
Banks and other financial institutions have also been warned that they too have been prohibited from doing any business related to ICO trading going forward.
Fallout from the crackdown
Though news of the upcoming crackdown was just released on Monday, the cryptocurrency market has already begun to feel the effects with Bitcoin’s price falling by more than five per cent to around $4,376.42 and Ethereum’s price dropping by 12 per cent.
A few Chinese ICO platforms have already begun to halt their services following the news. The local site ICOINFO lets users know that it would be voluntarily suspending “all ICO-related functionality on the site” temporarily until it knew more regarding how the government’s new regulations would work. The Shanghai-based bitcoin exchange platform, BTCC also suspended the trading of ICOCOIN over the weekend and its CEO Bobby Lee has previously come forward publicly to state that cryptocurrencies need to be regulated before they go out of control.
Chinese authorities also shut down a blockchain conference over the weekend over concerns that ICOs were being utilised to raise funds illegally according to Caixin.
The future of ICOs
ICOs have enabled startups to raise large sums of money without having to undergo the same level of scrutiny they would have faced by venture capitalists and while this has allowed them to compete, criminals could easily take advantage of the process to commit fraud or launder money.
It is clear that the cryptocurrency market is set for a big change as it has expanded so rapidly in such a short period of time. The governments of the world can no longer turn a blind eye and regulators in the US and Singapore have already highlighted the ways in which ICOs could be used for nefarious purposes.
On the other hand though, some experts believe that the space needs to be understood better by regulators before a crackdown like the one in China occurs elsewhere which could see an innovative and disruptive industry stifled before it can truly take off.