China bans ICOs as risks abound

BEIJING - Chinese authorities on Monday ordered a ban on Initial Coin Offerings (ICOs), a nascent form of fundraising in which technology start-ups issue their own digital coins, or "tokens", to investors to access funds as the rapidly expanding market spawned concerns over financial risks.

Starting Monday, ICO activities should be halted, and ICO platforms should not engage in exchange services between fiat currencies, virtual coins and tokens, said a statement from the People's Bank of China.

"ICOs, in essence, are a kind of unauthorized and illegal public fundraising, which is suspected of being related to criminal activities such as financial fraud and pyramid schemes," the statement said.

Following the news, the value of virtual currencies include Bitcoin immediately plummeted.

ICOs allowed companies to issue "tokens," or cryptocurrencies, to investors in exchange for currencies of more liquid value such as Bitcoin, without the need to follow rules associated with traditional channels such as IPOs.

Unlike IPOs, in which investors buy stocks in companies, investors in ICOs receive digital coins developed by the firms, which could appreciate in value if the companies fare well and demand for their currencies grows.

ICOs, once a game confined to a few, have taken off this year in China, attracting more players -- both innovators and scammers -- and catching the attention of regulators.

The move came as media outlet Caixin reported on Monday that the leading work group for risk prevention in Internet finance had issued a notice asking local authorities to conduct thorough inspections of ICOs and halt new coin issuance.

Last Wednesday, the National Internet Finance Association of China also alerted investors to risks associated with ICOs due to insufficient information disclosure and lack of protections for investors.

As word of possible regulation spread, two of China's leading ICO platforms, ICOAGE and ICOINFO, halted services.

The first token sale occurred in 2013, when Mastercoin sold its own digital tokens and raised 5,000 bitcoins, the most popular cryptocurrency.

In 2014, blockchain-based platform Ethereum raised more than 30,000 bitcoins.

With the value of such virtual currencies surging this year, ICOs have lured more investors eager to make a quick buck.

Data from Chinese trading platform Huobi.com showed the value of Bitcoin had jumped 59 percent in August alone, while Ethereum had surged 88.2 percent.

This year, 65 ICOs in China raised 2.62 billion yuan from 105,000 investors in the country, according to a report from the National Committee of Experts on the Internet Financial Security Technology.

Though the boom has helped tech companies access much-needed funds for development, it has also created fertile ground for scammers looking to take money from ignorant investors under the guise of ICOs, which could threaten the country's financial stability if left unchecked.

"From the perspective of issuers, investors and the market, ICOs have their risks," deputy head of Renmin University of China Law School Yang Dong told China Financial News, a news outlet of the central bank.

Analysts have advised that regulation of ICOs should focus on registration of financial products, proper information disclosure and underlying project quality.

Governments in other countries have started to take note of risks.

In a notice on Aug. 28, the US Securities and Exchange Commission (SEC) warned investors about potential scams involving stocks of companies claiming a relationship to or engagement with ICOs.

China's latest regulation came as authorities have repeatedly highlighted the importance of containing financial risk as the country faces a build-up of debt, and booming new financial products challenge regulations.

Since China's tone-setting economic conference last December pledged to make preventing financial risk a priority, regulators from the banking, securities and insurance sectors have made solid efforts to clean up the market.