Initial coin offerings, or ICOs, are the hot fundraising tactic of the year, giving startups—usually cryptocurrency-related ones—the chance to get funded in exchange for virtual coins rather than company shares. But China isn't hopping on board.
On Monday, the Chinese central bank declared ICOs to be illegal. Lumping ICOs in with pyramid schemes, the central bank demanded that such schemes should stop immediately, and those that have already run ICOs should return investors' cash.
Companies that persist with ICOs now risk seeing their websites and mobile apps shut down and their business licenses revoked. The central bank also noted that virtual currencies do not have a legal status equivalent to that of money and should not be circulated as proper currency.
China's move comes shortly after the U.S. Securities and Exchange Commission (SEC) warned investors that companies might be using ICOs to pump and dump their shares. The Canadian authorities have also warned of "unethical practices or illegal schemes."
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ICOs are generally deployed by startups that are building business around a blockchain—the sort of distributed ledger mechanism that powers cryptocurrencies such as bitcoin and ether, but that can also be used to store other kinds of information, such as "smart" contracts. The idea is that investors get tokens for their investment that can then be used in the startup's business, if it materializes. However, many see the tokens as a speculative investment.
In its Monday statement, the Chinese central bank said the public should be "highly alert" to the risks of ICOs, while the financial industry should resist activities that could lead to "market chaos." The central bank is itself reportedly considering the introduction of an official Chinese cryptocurrency.
Rumors of the impending announcement spread days ahead of its appearance, leading to the reported cancellation of a Beijing conference about ICOs.