China on Monday banned and deemed illegal the practice of raising funds through launches of token-based digital currencies. The move was targeted at so-called initial coin offerings (ICO), which market has exploded since the start of the year (See: Bitcoin cash surges 40 per cent in single day).
A People's Bank of China document labels ICOs as an unauthorised fundraising tool that may involve financial scams and pyramid schemes, and which ''severely disrupt the social and economic order''.
A central bank committee also provided a list of 60 major ICO platforms that local financial regulatory bodies will need to thoroughly inspect and report on, local media outlet Caixin reported.
Initial coin offering or ICO is a crowd funding method where new crypto-assets raise capital in exchange of new tokens with established ones like bitcoin, ether or even with fiat currencies like the US dollar.
Such ICOs have become a bonanza for digital currency entrepreneurs, globally and in China, and have provided the fuel for a rapid ascent in the value of cryptocurrencies this year that has driven fears of a bubble that could burst, according to Reuters.
In the first six months of 2017, Chinese investors have pumped 2.6 billion yuan ($394 million) in ICOs, a government study said. The study further assumes this number to be much larger as it did not include sales through private placements, as per Caixin.
Reports from the Chinese media in recent days had suggested that the government might soon crackdown on ICOs.
On 2 September, Caixin reported that authorities had shut down a blockchain conference over the weekend on concerns that unregulated initial coin offerings (ICOs) were being used to raise funds illegally.
Since then, price pullback started in the market over the weekend and saw extended losses on Monday after the news became official.
The cryptocurrency market has lost close to $36 billion in value since Friday and currently stands at $142 billion, according to industry website Coinmarketcap.com.
After peaking close to levels of $180 billion, the total market cap of cryptocurrencies has dropped around 20 per cent as of time of reporting.
Individuals and organisations that have completed ICO fundraisings should make arrangements to return funds, said a joint statement from the People's Bank of China (PBOC), the securities and banking regulators and other government departments that was posted on the central bank's website.
Bitcoin rival Ethereum, which token-issuers usually ask to be paid in and which has therefore seen unprecedented growth this year, fell sharply on the news, last trading down almost 20 per cent on the day at $283, according to trade publication Coindesk.
Bitcoin was also down 8 per cent, while the total value of all cryptocurrencies was down around 10 per cent, according to Coinmarketcap.com.
"The large price falls can be attributed to panic amongst traders and profit-taking," said Cryptocompare founder Charles Hayter.
The rapid ascent of ICOs prompted the US Securities and Exchange Commission (SEC) to warn in July that some ICOs should be regulated like other securities. Singapore and Canada followed with similar warnings.
Zennon Kapron, director of the Shanghai-based financial technology consultancy Kapronasia, told Reuters he suspected regulators were putting the brakes on ICOs in order to better understand the phenomenon, but could ease off in the future.
"Regulators globally are struggling to understand what ICOs are, what the risks are, and how to ring-fence and regulate them," he said.
Quick and easy
By creating and issuing digital tokens, entrepreneurs can raise large sums quickly - sometimes hundreds of millions of dollars in minutes - with little or no regulatory oversight. But unlike traditional fundraising, token holders are generally not given any share in the particular project, nor any security.
For the buyer, therefore, the main reason for buying these highly risky tokens is often simply a bet that their value will rise. Once the tokens have been issued they can be traded against other cryptocurrencies such as bitcoin, the first successful digital-only currency.
The popularity of coin offerings has surged in China this year.
In July, the state news agency Xinhua cited data from a government organisation that monitors online financial activity to report that there had been 65 ICOs so far during the year raising a combined 2.62 billion yuan ($394.6 million) from 105,000 individuals in the country.