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Chinese regulators have launched a crackdown on sales of cryptocurrency-based fundraising schemes known as “initial coin offerings,” amid concerns that they are fuelling financial risk and outright fraud.
President Xi Jinping has called “financial security” a top policy priority this year, and regulators are concerned that ICOs are a magnet for scammers preying on the speculative fervour of Chinese investors.
The state-controlled National Internet Finance Association of China warned investors late on Wednesday to use caution before investing in such schemes. The rapid rise of ICOs has “thrown the social economy into disorder and created rather large risks and hidden dangers”, the group said, adding that some ICOs “have used various misleading promotional methods” and are “suspected of fraud”.
The official Shanghai Securities News reported on Thursday that Chinese regulatory agencies have launched an investigation into ICOs, which are currently unregulated. ICOs raised about Rmb5bn in August alone, according to the paper, which cited data compiled from various ICO platforms.
Also on Wednesday, a leading platform for ICO projects, ICOINFO, announced it was suspending its business “for consideration of risk prevention”.
An ICO is a fundraising scheme in which a start-up enterprise issues blockchain-based coins to investors in exchange for bitcoin. The enterprise, which is typically a technology venture that intends to develop a new blockchain-based application, uses the bitcoin proceeds to finance its development.
The newly issued coins are often called “tokens” because they are not necessarily intended as currency. In some cases, the tokens are like equity in the new venture, entitling the holder to dividends. In other cases, they serve a function on the new blockchain-based network that the enterprise is developing.
On Monday, the US Securities and Exchange Commission also warned “about potential scams involving stock of companies claiming to be related to, or asserting they are engaging in, Initial Coin Offerings.”
Much of the popularity of ICOs is inspired by the success of Ethereum, a blockchain-based platform for software developers that conducted the first ICO.
Ether tokens are used to run software applications on the Ether network. But ether tokens also trade on the secondary market. The price of one ether token has risen from $11 a year ago to $381 on Thursday, according to Coinmarketcap.com. That has fuelled rampant speculation on other ICOs, most of which now accept ether as well as bitcoin.
“It’s pretty sketchy. Everyone is waiting for regulators to come out with guidance. That’s why we’ve seen so many of them now,” said Zennon Kapron, principal at Shanghai-based fintech consultancy Kapronasia. “Rather than having to deal with a venture capital fund or do an IPO, these involve much less effort. You have a white paper and an idea, and you go to market.”
One ICO planned soon is by Red Pulse, a China market research service. The group hopes to raise $15m by issuing RPX tokens, which can be used to access research content. The mechanism is intended to limit circulation of proprietary content and ensure that analysts are fairly compensated.
Chinese authorities scrutinised major bitcoin exchanges earlier over concerns about capital flight and money laundering. They previously banned banks from handling bitcoin transactions and declared that it was not a currency.
At the same time, the central bank has also formally declared its intention to issue its own blockchain-based currency.
Additional reporting by Nan Ma
Twitter: @gabewildau
