Cryptocurrencies plunge as China bans initial coin offerings

China’s central bank, the People’s Bank of China (PBOC), issued a statement on Monday ruling that “all types of currency issuance financing activities shall cease immediately”.

All funds raised by issuing tokens to investors in exchange for cryptocurrencies such as bitcoin must be returned. All trading of tokens for virtual and fiat currencies must also cease. Additionally, all financial institutions are barred from providing services related to the financing through token issuance.

Returning funds to investors could prove to be a considerable headache for closed ICOs.

The Chinese clampdown follows the 25 July ruling by the US Securities and Exchange Commission (SEC) that ICOs should be treated as investment securities and subject to the relevant regulations. Some ICO promoters responded to the SEC ruling by either tightening access to ICOs or by making them unavailable to US investors.

Nevertheless, ICOs are not banned in the US, unlike the case in China. Chinese investors will now find themselves locked out of ICOs worldwide. For example, the ongoing LakeBanker ICO has excluded Chinese investors from its token sale.

Further evidence of the tightening regulatory climate saw the SEC contact the Protostarr ICO in late August about concerns it had, which led to the ICO closing down.

In a sign of the Wild West nature of the ICO space, chief executive Joshua Wilson, who described the Protostarr operation as “just a couple of guys who are tech nerds in our basement”, said: “It didn’t occur to us that the model everyone else in the world is using would have any specific laws here that would apply to us. We just weren’t aware.” Protostarr is refunded the ether funds it received from investors.

In China, concerns about the unregulated fundraising seen in ICOs has been growing recently.

On 21 August the Pudong Market Authority, the regional financial regulator that covers Shanghai announced on its Weibo (a microblogging site) account that “law enforcement officers ordered to immediately stop the Global Blockchain Summit in Shanghai, and interviewed relevant parties. At present, the company related to suspected illegal situation is under further investigation”.

It later emerged that the company concerned was Metaverse, a blockchain platform and the main organiser of the Finwise 2017 Global Blockchain conference, which took place in Shanghai. The inspection of the conference took place on 31 July. Initially the authorities said their intervention was part of an investigation into pyramid selling schemes but then changed that to concerns about “false information” provided by ICOs.

Metaverse’s Entropy (ETP) token initially fell 15% on news of the investigation but recovered somewhat when the regulator changed its message to “false information”. The token has given up 80% of its value in the past 24 hours according to British Virgin Islands-based cryptocurrency exchange bter.com.

Another China-based blockchain platform called NEO (formerly Antshares) was launched in China this year, generating interest around its token of the same name. The price of NEO has fallen heavily on the news from the PBOC. It has dropped by a third in price over the past 24 hours, now trading at $20.55. The market capitalisation of the token stood at $2.4 billion on 14 August and is currently less than half that value, at $1 billion, according to Coinmarketcap.com.

In another indication that a clampdown may have been coming, on 30 August Chinese information and ICO platform ICOinfo (ico.info) suspended all ICO business.

Chinese angel investor and blockchain enthusiast Xue Manzi, commenting before the latest news, told Beijing News that “because there is no regulation, 90% of the ICO market are rubbish and requires great vigilance to avoid losing money”. He recommended that the “government should soon introduce regulatory policies to standardise the industry”.

The authorities have now done much more than that by closing down ICOs altogether. The statement, however, does not seem to specifically prevent blockchain projects from using tokens and issuing them to members of the public – they just cannot be sold or traded or issued as part of a company’s financing.

It remains to be seen whether the government will revisit its decision at a later date by legalising ICOs, but only after it has put in place firm regulatory controls on how they are conducted.

This is an approach regulators took towards the Chinese cryptocurrency exchanges, forcing them to suspend withdrawals in February this year after the PBOC said it would close those that did not observe foreign exchange management and anti-money laundering rules. The exchanges reinstated withdrawals in June after putting in place stronger processes.

Pyramid selling and other financial scams are rife in China due to the immature nature of the investing environment and lack of financial education. The Chinese ban on ICOs may already be affecting investor sentiment beyond its borders, with the bitcoin price pulling back from its all-time high around $5,000 to trade at $4,416 on the Coindesk bitcoin price index. Ethereum is down 12% today, trading at $307.

UK financial authorities are yet to issue any advice to UK investors.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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