Seven (7) financial regulators in China issued a joint statement this week officially banning all Initial Coin Offerings (ICOs) within the People’s Republic of China (PRC).
The statement further demands that the proceeds from all past ICOs be refunded to investors or face being “severely punished according to the law.” This action by Chinese regulators resulted in large sell-offs for most cryptocurrencies.
Initial Coin Offerings (ICOs)
An Initial Coin Offering (ICO) is an unregulated means of crowdfunding via use of cryptocurrency. The term is often confused with ‘token sale’ or crowdsale, which refers to a method of selling participation in an economy, giving investors access to the features of a particular project starting at a later date. ICOs, on the other hand, sell a right of ownership or royalties to a project. The coin in an ICO is a symbol of ownership interest in an enterprise, and/or is exchangeable for services provided by the enterprise. In contrast to initial public offerings (IPOs), where investors gain shares in the ownership of the company, for ICOs the investors buy coins of the company, which can appreciate in value if the business is successful.
Regulations in China
The joint statement outlined why regulators believe ICOs represent illegal fundraising mechanisms under domestic law, and was backed by the People’s Bank of China (PBOC), the Central Network Office, the Ministry of Industry and Information Technology (MIIT), the State Administration for Industry and Commerce (SAIC), the China Banking Regulatory Commission.
A translation of the statement reads: “ICO financing refers to the activity of an entity raising virtual currencies, such as Bitcoin or Ethereum, through illegally selling and distributing tokens. In essence, it is a kind of non-approved illegal open fund raising behavior, suspected of illegal sale tokens, illegal securities issuance and illegal fund-raising, financial fraud, pyramid schemes and other criminal activities.”
Furthermore, “as of the date of this announcement, all types of currency issuance financing activities shall cease immediately.”
Additionally, “persons or organizations who have completed ICOs shall refund the investors, protect the investors’ rights, and deal with the risks properly. It concluded with a warning that “people who refuse to cease ICO activities or refuse to refund investors will be investigated and severely punished according to the law.”
Other articles prohibit financial institutions (e.g., banks) from doing business relating to ICOs, warn about the public risks of trading ICO tokens, and state that “as of the date of this announcement, trading platforms shall not conduct any exchange business between fiat money and tokens, shall not provide information and price for token trading.”
Regulation in the United States
China’s harsh regulation of ICOs arrives on the heels of significant, but less-restrictive, regulation in the United States. In July 2017, the U.S. Securities and Exchange Commission (SEC) indicated that it could have the authority to apply federal securities law to ICOs. The SEC did not state that all blockchain tokens would necessarily be considered securities, but that determination would be made on a case-by-case basis. The SEC action was predicted to encourage more mainstream investors to invest in ICOs, although on their faces ICOs often forbid U.S. investor participation in order to remain out of the jurisdiction of the United States government.
The value of cryptocurrency assets issued by way of ICOs has seen a substantial impact in the wake of China’s new regulations. Most impacted were the largest ICO tokens, with OmiseGo and Qtum declining from total market values of above $1 billion earlier this week.
Ethereum, Bitcoin and other digital currency prices also nosedived after China officially banned ICOs, however many of these digital currency prices have since recovered.