The hype around ICOs or initial coin offerings has reached fever pitch in the US, with celebs like Paris Hilton endorsing new digital currencies and mainstream outlets such as CNBC offering viewers advice on how to build their own “cryptocurrency portfolio.” In China, though, the authorities have had enough, and today the Chinese government took the bold move of banning ICOs all together.
The ruling comes from China’s central bank, which issued a statement criticizing ICOs for “disrupting” the country’s financial order. The regulator described initial coin offerings as “a form of unapproved illegal public financing” that “raises suspicions” of fraud and criminal activity, reports the Financial Times. Although the valuation of bitcoin fell in response to the news, the regulation does not directly target the popular cryptocurrency.
Critics say some ICOs are little better than pyramid schemes
In the past year, there has been a boom in ICOs, driven in part by the soaring value of more established cryptocurrencies. While projects like Bitcoin aim to offer an alternative to state-backed currencies, ICOs often have narrower and more gimmicky uses. Lydian Coin, for example, (the ICO that Paris Hilton endorsed this morning) is supposed to be used solely for buying advertising campaigns; while Filecoin (an ICO backed by the Winklevoss twins) is a digital token that’s exchanged for data storage.
Financial experts say ICOs range in quality from serious (if overambitious) attempts to build new digital currencies, to projects that are little more than pyramid schemes. The Financial Times’ Alphaville blog compared ICOs to Kickstarter campaigns for “crypto-nerds,” where investors are persuaded to fork over cash for a product that hasn’t yet been built and that could go nowhere.
If investment in ICOs constitutes a bubble, though, it hasn’t burst yet. It’s estimated that coin offerings have raised $1.6 billion in 2017 alone, with 65 launches in China totaling some 2.6 billion yuan or $398 million (according to a report from the National Committee of Experts on the Internet Financial Security Technology). This rush of money is why the technology has invited the wrath of Chinese regulators, who are enforcing the government’s orders to make “financial security” a top priority.
Similar regulation may soon be coming to America, too. This July, the US Securities and Exchange Commission (SEC) warned that ICOs were being used to sidestep the law, and last week the agency issued another statement describing coin offerings as “potential scams.”
Jehan Chu, a partner at Kenetic Capital who advises on the sale of tokens, told Bloomberg that China needed to act first “due to its size.” However, he added that today’s news is “somewhat in step with ... what we’re starting to see in other jurisdictions — the short story is we all know regulations are coming.”