China Put’s The Kibosh on Cryptocurrency Funding
By admin September 6, 2017

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In the latest chapter of the cryptocurrency rollercoaster, over the weekend China put a dramatic halt on ICO’s (initial coin offerings), decrying it to be “an unauthorized and illegal public funding activity.” The halt essentially prohibits digital token financing and trading platforms from doing conversions of coins with fiat currencies. Reflected by a joint statement issued by seven financial regulators, the Chinese crackdown on ICO’s poses the largest regulatory threat thus far to the burgeoning market of digital token sales.

Initial coin offerings or “token fundraising” is the process where fundraisers trade virtual tokens unique to the issuing company in exchange for cryptocurrencies of immediate, liquid value such as bitcoin or ether. The tokens are issued on an indelible ledger, or blockchain, and can therefore be traded. Unlike shares, they do not confer ownership rights. Instead, investors hope that the company’s or projects success will cause the tokens value to rise. In 2017 alone, token sales have raised $1.6 billion for blockchain-based projects.

The rise in finance channels that expand beyond the traditional banking system, naturally invited Chinese regulators to intervene, endeavouring to enforce the governments “financial security” priority. On Monday the People’s Bank of China said that it had completed investigations into ICOs and ruled it will strictly punish offerings in the future while penalizing legal violations that have already occurred. Chief among the banks concern is that ICO’s raise suspicions of fraud and criminal activity. Unsurprisingly, the vast amount of money amassed in such a short window has attracted cyber criminals penetrating the sector. An estimated 10 percent of money raised through ICO’s has been looted by scams such as phishing.

China has become the epicentre of the cryptocurrency frenzy. Already in 2017, Chinese-based ICO’s raised 2.6 billion yuan through 65 ICO’s with more than 100,000 investors. The unchecked growth of the sector poses a threat to China’s financial market stability and places China in a particularly precarious position if the cryptocurrency bubble bursts. As such, the Chinese clampdown on the ICO sector could well mean the government is warding off more troublesome financial concerns for consumers down the line.

Charles Hayter, chief executive and founder of digital currency comparison website CryptoCompare said China’s cryptocurrency crackdown was expected due to “irrational excesses” in the market. Due to the size and speculative nature of the Chinese IPO market, Hayter commented, “this is certainly the Chinese state laying down the law and threatening all and sundry”.

While the move may not be permanent and does not directly affect established cryptocurrencies, the immediate halt caused the price of Bitcoin and Ethereum, the two most popular digital currencies, to tumble. Having hit an all-time high of more than $5,000, Bitcoin dropped to $4,037 on Tuesday.

It remains to be seen what impact China’s ban and overall strategy will have on both the short and long term future of the ICO market and cryptocurrency sector worldwide. There are rumours China is looking to mint its own national currency, the first in the world to do so, thereby allowing state control over the platform. However, what can be said with surety is the sector faces a myriad of unknowns and as a result it can be presumed further regulation, both in China and throughout the rest of the developed world, is coming.

Further Reading:

China Outlaws ICOs” Financial Regulators Order Halt on Token Trading

China bans all ICOs and digital currency launches as ‘illegal public financing’

Bitcoin in China: An Insider’s View

Bitcoin Tumbles as PBOC Declares Initial Coin Offerings Illegal

China Becomes First Country in the World to Test a National Cryptocurrency

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