In Brief
China's financial institution regulators have now banned initial coin offerings or ICOs from the country. Existing ICO platforms are being ordered to cease all activity and trading involving ICOs. Regulators are expected to investigate them, too.

Illegal Financing

While the U.S. Securities and Exchange Commission (SEC) has warned they will be more closely regulating initial coin offerings (ICOs), regulators in China have now effectively banned them. According to a report from local news outlet Caixin, a working committee comprised of 17 government administrations — which included the People’s Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission — released a statement that labelled ICOs as “illegal financial activities” that can seriously disrupt “the economic and financial order.”

The popularity of ICOs has gone up over the past months, with more blockchain-based startups opting for cryptocurrency-based funding over the usual dependence on venture capital. ICOs give starting business a huge amount of leeway, making it easier for them to receive funding.

In the statement dated September 4, the Chinese committee said that it is prohibiting all organizations and individuals from engaging in fundraising activities involving ICOs. Banks and other financial institutions have also been prohibited from transacting with those involved with ICO trading. Aside from the ban, local Chinese financial regulators will also begin to inspect major ICO platforms throughout the country. A list containing 60 of these was included in the joint statement.

Tools of Fraud?

While ICOs are closely tied to cryptocurrencies and their underlying blockchain technology, China isn’t instituting a ban on these. In fact, China continues to be at the forefront of cryptocurrency adoption. The fears over ICOs come from their potential to be used in illegal transactions and financial scams, such as pyramid schemes.

“ICOs are vulnerable to money laundering and terrorist financing risks due to the anonymous nature of the transactions, and the ease with which large sums of monies may be raised in a short period of time,” said the Monetary Authority of Singapore (MAS), Singapore’s central bank, in a statement released earlier in August. This concern was echoed in the Chinese statement.

ICO fundraising has now accumulated some $1.6 billion in total worldwide, and according to a report by Goldman Sachs, it’s surpassed traditional venture capitals for the first half of 2017. It doesn’t help, however, that some of these have so-called uncapped ICOs — i.e., there’s no upper limit to how much these companies could raise — which investors say could be dangerous. Plus, many of the startups that have successfully raised ICOs were not able to move forward with their projects beyond just producing a white paper.

Already, some ICO platforms in China have ceased their operations, like ICOage and ICO.info. The latter posted on its website that it’s putting the breaks on “all ICO-related functionality on the site,” until such time things are clarified. Shanghai-based Bitcoin exchange platform BTCC also stopped trading ICOCOIN over the weekend.

Disclosure: Several members of the Futurism team, including the editors of this piece, are personal investors in cryptocurrency markets. Their personal investment perspectives have no impact on editorial content.