The People’s Bank of China issued a statement on 4 September 2017 declaring initial coin offerings (ICOs) illegal and that all related fundraising activity should “cease immediately”. As part of the ban, Chinese authorities have also called on individuals and organisations to refund investors for any amount raised through ICOs.
The move is aimed at protecting investors and “dealing with the risks properly”, said a joint statement from the People’s Bank of China, securities and banking regulators and other government departments issued on Monday.
ICOs involve the sale of virtual coins mostly based on the Ethereum blockchain, which is similar to the technology that underpins bitcoin. Instead of the shares issued in a traditional IPO, investors in an ICO receive virtual tokens that are unique to the issuing company or its network. That means they grow in value only if the start-up’s business or network proves viable.
In China, close to $395 million was raised from investors this year, according to data from state news agency Xinhua. And it is part of a growing global trend. The research site CoinDesk suggests more than $1.5 billion in capital has been raised through ICOs since the start of the year.
China is not the only jurisdiction looking closely to crypto-currencies and ICOs. The US Securities and Exchange Commission ruled in July that some of the ‘coins’ for sale are actually securities and therefore subject to its regulation. Crypto-currencies are also included in the initial proposals for European Union’s 5th Anti Money Laundering Directive, which is due in 2018.
However, there are also countries that are taking a more innovative approach to the industry and are jostling to develop frameworks that easily accommodate the new technology. Singapore and Switzerland are the only two jurisdictions in the world where tokens are treated as an asset and not as a security. Estonia, a country that prides itself on being at the cutting edge of digital technology, is floating the idea of issuing its own crypto-currency, known as estcoins.
If you are thinking of launching a venture in the new financial technology arena, Sovereign can assist you to find a jurisdiction to fit your idea. We believe that regulation in this market will be a good thing but we are also wary of over regulation because this will limit innovation. Establishing best practices and systems of self-regulation by industry stakeholders will probably be the best way forward in this market.
For more information, contact us.