Chinese bank calls initial coin offerings illegal
Bitcoin drops most since July after bank promises penalties.
Bitcoin tumbled the most since July after China’s central bank said initial coin offerings are illegal and asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales.
The People’s Bank of China said on its website Monday that it had completed investigations into ICOs, and will strictly punish offerings in the future while penalizing legal violations in ones already completed. The regulator said that those who have already raised money must provide refunds, though it didn’t specify how the money would be paid back to investors.
It also said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies. Digital tokens can’t be used as currency on the market and banks are forbidden from offering services to initial coin offerings.
“This is somewhat in step with, maybe not to the same extent, what we’re starting to see in other jurisdictions — the short story is we all know regulations are coming,” said Jehan Chu, managing partner at Kenetic Capital Ltd. in Hong Kong, which invests in and advises on token sales. “China, due to its size and as one of the most speculative IPO markets, needed to take a firmer action.”
Bitcoin tumbled as much as 11.4 percent, the most since July, to $4,326.75. The ethereum cryptocurrency was down more than 16 percent Monday, according to data from Coindesk.
ICOs are digital token sales that have seen unchecked growth over the past year, raising $1.6 billion. They have been deemed a threat to China’s financial market stability as authorities struggle to tame financing channels that sprawl beyond the traditional banking system. Widely seen as a way to sidestep venture capital funds and investment banks, they have also increasingly captured the attention of central banks that see in the fledgling trend a threat to their reign.
There were 43 ICO platforms in China as of July 18, according to a report by the National Committee of Experts on the Internet Financial Security Technology. Sixty-five ICO projects had been completed, the committee said, raising 2.6 billion yuan ($398 million).
“This is a positive move given the rapid proliferation of low quality and possibly fraudulent coin sales promising the moon,” said Emad Mostaque, London-based co-chief investment officer at Capricorn Fund Managers Ltd. “There is tremendous value in the model but we need to see more separation of high quality, ethical offerings versus those seeking to circumvent securities law for a quick buck.”
A cross between crowdfunding and an initial public offering, ICOs involve the sale of virtual coins mostly based on the ethereum blockchain, similar to the technology that underpins bitcoin. But unlike a traditional IPO in which buyers get shares, getting behind a startup’s ICO nets virtual tokens — like mini-cryptocurrencies — unique to the issuing company or its network. That means they grow in value only if the startup’s business or network proves viable, attracting more people and boosting liquidity.
That’s a big if, and the profusion of untested concepts has spurred talk of a bubble. The U.S. Securities and Exchange Commission signaled greater scrutiny of the sector when it warned that ICOs may be considered securities, though it stopped short of suggesting a broader clampdown. The regulator reaffirmed its focus on protecting investors, however, and said issuers must register the deals with the government unless they have a valid excuse.
The vast amount of money amassed in a short span of time has also attracted cyber criminals, with an estimated 10 percent of money intended for ICOs looted away by scams such as phishing this year, according to Chainalysis, a New York-based firm that analyzes transactions and provides anti-money laundering software. mation relayed from volunteers who have spoken to flood victims in need of help. The app has a private chat function as well as open public channels.
Zello CEO Bill Moore said the app is more popular outside the United States, where some people use it as a phone call replacement or as a political organizing tool.
The app is free to download; the company makes money off its premium version that it markets to businesses.
“Radio-style communication can be really efficient, and it’s such a great way to organize groups of people, which is the case with a lot of crises,” Moore said.
The American-Statesman wrote about Zello in 2014, when it received media attention for its use in political protests in countries such as the Ukraine and Venezuela.
That has made Zello an enemy of foreign governments on several occasions. At one point the Venezuelan government blocked the app, and currently the government of Russia is trying to block the app, Moore said, though so far those efforts have been unsuccessful.
Moore said there are 100 million registered Zello users throughout the world, so the extra usage during Harvey wasn’t significant for them. But Moore said there were “hundreds of thousands of people using it in the Houston area.”
“The number of new users in the Houston area went up by a factor of 20,” he said, when compared with the week before Harvey hit.