Early this morning a Chinese working committee representing seven government administrations including the People’s Bank of China, and the regulatory, banking and insurance commissions ruled that Initial Coin Offerings (ICOs) constitute an illegal means of capital acquisition. Organizations and individuals are now expected to cease all ICO related activity, and banks and financial institutions are instructed to cease all business with organizations that do.
The committee’s joint statement cited misleading marketing and a lack of transparency in many issuing organizations’ intentions, suspecting that many ICO schemes may constitute fraud, illegal fundraising, and illegal issuance of securities. It is also being reported by Asia News and Coin Telegraph that 60 ICOs have either delayed or canceled sales pending review by local financial regulatory bodies, and multiple FinTech conferences planned in China have had to reevaluate their events.
The statement said that Individuals and organizations that have completed fundraising through ICOs should make appropriate arrangements to return funds to protect investors and deal with risks.
ICOs are best understood as an offering to the digital money community, but unlike an IPO which is the purchase of equity, an ICO is the purchase of tokens that allow for participation in the economy of an upcoming project in some way — often having no intrinsically obvious value relationship with the organization's final product. ICOs have proven popular with developers with more than one billion dollars raised through them in 2017 so far, because of their ease to raise large sums of capital before work on a project has begun, and greatly reduced regulator and investor scrutiny.
At the time of writing Bitcoin has dropped several hundred dollars in the wake of the news to $4250, with traders appearing to first dump positions in ICO-funded alt-coins en-masse before exiting into USD. Ethereum is down more than 15% to dip below $300. Chinese-based ICO projects appear the hardest hit, with NEO, also known as “The Chinese Ethereum” down more than 40% against the dollar.
China is not alone in holding a microscope to the ICO industry, with the US Securities Exchange Commission ruling in late July that many ICOs are securities and must comply with the appropriate regulations. Experts in the industry welcome sensible regulations that may protect consumers, but are concerned that excessively burdensome regulations could stifle innovation in the space.