China has declared an immediate ban on all initial coin offerings (ICOs), citing a lack of regulatory oversight. The People’s Bank of China announced the ban on September 4, and ordered all businesses and individuals to issue refunds for any investment raised.
ICOs represent a relatively new way for businesses to conduct fundraising, whereby virtual tokens, essentially mini-cryptocurrencies, are created and sold to investors. These tokens then grow in value as the company becomes more successful, but concerns have been raised about the legality of some of the organisations involved.
There is currently a lack of regulation surrounding the issuing of new ICOs which, when coupled with the anonymous nature of cryptocurrencies, makes them attractive propositions for fraud and other criminal activities. This year, phishing scams connected to ICOs have cost investors an estimated $225m.
In China alone, $394.6m has been raised from ICOs this year
China is far from the only market to take issue with the growing popularity of ICOs as a fundraising method. In July, the US Securities and Exchange Commission ruled that tokens issued via ICOs are subject to the same regulation as other securities.
“This is somewhat in step with, maybe not to the same extent, what we’re starting to see in other jurisdictions – the short story is we all know regulations are coming,” Jehan Chu, a partner at Kenetic Capital, told Bloomberg. “China, due to its size and as one of the most speculative IPO markets, needed to take a firmer action.”
Aside from any criminal associations, there is a feeling that ICOs are creating a financial bubble that must be reined in. In China alone, $394.6m has been raised from ICOs this year. Although ICO bans may end up being temporary measures, approved platforms and greater regulatory scrutiny will need to emerge before the fundraising method gains approval from national governments.