China Cracks Down On ICOs, Banning Them As Crypto-Crime Spikes

Josh O'Neill

5 September 2017

China's central bank has declared initial coin offerings (ICOs) illegal, seizing a vice-like grip on the controversial fundraisers as the regulator looks to rein in related risks while controlling external fund flows.

The People's Bank of China said yesterday on its website that it had completed investigations into who advises on crypto-currency-related matters, told this publication. “China traditionally seeks to protect movement of funds from outside of the country. They are anti-crypto-currency generally and, of course, controlling crypto is something that is very difficult for them.”

He continued: “A complete ban on ICOs will stop businesses in China funding via this method, but is that a good thing for China generally? Perhaps not; all businesses need to move with the times.”

ICOs, a meld of crowdfunding and an initial public offering (IPO), involve the sale of digital tokens by blockchain start-ups looking to grow their business. But unlike a traditional IPO in which investors get shares, investors in ICOs are instead rewarded with mini crypto-currencies, the value of which is directly tied to the business' performance. This means the digital coins grow in value only if the start-up's operation or network proves viable, attracting more investors and driving up liquidity.

The fundraisers have drawn scrutiny from regulators in recent times, with warnings having been fired over mass phishing scams potentially leaving one-in-10 investors in ICOs penniless.

Howlett suggested that China's move could drive ICOs underground, opening up a black market akin to the Wild West where investor protections are absent. He added, however, that there are “plenty of other countries” without regulations in place, and these are where blockchain start-ups will likely flock to.

“This will be a race to the very end with the last country standing – one with no regulations – being the main player in this crypto revolution,” he said.

By mid-July this year, technology firms had raised around $1.1 billion through 89 coin sales, roughly 10 times more than that in the whole of 2016, according to Reuters. There are still at least 95 more ICOs to come this year, according to tokendata.io, an online token sales tracker.

Crypto-Crime
Criminal losses related to ICOs are at around $225 million this year, according to , the first and most well-known digital coin.

This reported rise in cyber-crime linked to crypto-currency ventures may have been noted by the US Securities and Exchange Commission, which in July signalled closer scrutiny of the sector when it warned tokens issued through ICOs could be considered securities. Still, it stopped short of suggesting a broader crackdown.

Singapore followed suit just a week later, when the city-state's regulator and central bank said it would bring ICOs into its cross-hairs, subjecting them to the same regulations as securities.