China bans initial coin offerings sending bitcoin price tumbling as central bank rules them illegal


Many startups are raising money by issuing digital tokens (Source: Getty)

Is the ICO bubble about to burst?

In China, perhaps.

The country's authorities have ruled that initial coin offerings are illegal and has banned them from taking place.

The Peoples's Bank of China (PBC), the country's central bank, and other regulating authorities have said companies raising cash via a cryptocurrency or digital token will not be allowed.

Read more: Estonia could be the first country to do its own initial coin offering

"The tokens or 'virtual currency' used in coinage financing are not issued by the monetary authorities, do not have legal and monetary properties such as indemnity and coercion, do not have legal status equivalent to money, and can not and should not be circulated as a currency in the market use," it said in a statement, warning of the risks.

A local finance news source says authorities are looking at 60 exchanges.

The move sent the price of bitcoin tumbling after it reached all-time highs above $5,000 last week. Bitcoin had already fallen but dropped sharply lower again on the news, by around five per cent, or more than $200, to $4367, according to Coindesk.

It's not yet clear how the new rules will impact more established digital currencies such as bitcoin and ethereum. The latter is a popular choice for ICOs.

"Ethereum itself was an ICO and bitcoin was simply created - the devil will be in the details and show through actions of the Chinese authorities," said Charles Hayter, chief executive and founder of CryptoCompare.

"At present its not fully clear who will be subject to what rules. Although a ban on bitcoin and ethereum does seem extremely far fetched this seems more like an attempt to curtail enthusiasm and bring rigour. Long term this had to happen - it was only a question of time - and with the US and Chinese authorities looking to regulate there is a silver lining for long term reduction in scams and poorly planned and executed projects."

It's the most significant crackdown yet by a national authority in the wild west of ICOs - where a digital token is issued to investors in return for something such as equity, or access to a platform, though some offerings have been less than clear about what's on offer.

In the US a startup called Protostarr was forced to shutdown after attracting the interest if the Securities and Exchange Commission (SEC), the finance and markets regulator.

It had raised $47,000 - a relatively small amount compared to many of the multimillion dollar ICO of recent months - to create a blockchain-based tool for managing digital rights for content producers, such as YouTube stars. 

While the SEC did not take any action, the startup said it decided to shut down as it was not clear what kind of legal resources would be necessary to assist the SEC in its investigation. 

Read more: Whoppercoin anyone? Burger King has launched its own cryptocurrency

In July the SEC issued its first ever advice on ICOs, which have rocketed in recent months and raised billions. Prompted by the failure of the DAO last year, it advised potential investors of the risk it indicated that ICOs would be classed as securities, meaning they come under such existing rules.

If any more proof were needed as to the frothiness of ICOs, former reality celeb Paris Hilton tweeted overnight that she would be participating in the Lydiancoin token sale.

Champion boxer Floyd Mayweather Jr has promoted two ICOs on social media, though it's not clear if he invested.