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September 18, 2017

Chinese ICO Ban — What is in store for Investors?

September 17, 2017

Abstract

Regulators in China have banned all initial public coin offerings pending a review and the possible introduction of regulations to control the booming market. News that China was considering banning ICOs emerged last week when it was reported that China’s Securities and Futures Commission, the China Banking Regulatory Commission and other regulators had met and were considering a ban on all ICOs until concerns about risks were addressed.

In a separate report, Asia Times claimed early Monday in China that along with the immediate ban of all ICOs in the country, China’s Remediation Office of Risks in Internet Finance has ordered that all ICOs in the country be investigated by local regulatory authorities.

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Few hours back many leading Cryptocurrency and mainstream financial publication broke the news that China is banning all ICOs and is also directing existing individuals and companies who raised funds using ICO to make arrangements return the funds and such a decision was taken to reasonably protect the interests of investors and properly handle the risks.

This puts the future of may ICOs, tokens and Cryptocurrencies like Redpulse, NEO, LakeBanker, Bytom, Hsare, Binanace in limbo. All the cryptocurrencies along with Bitcoin & Ethereum are showing decline over the news and have been in red over the weekend but the biggest looser are the Chinese cyrptocurrences. With this development billions of dollars are moving out of the crypto markets which may be attributed to latest news from China. This was bound to happen as PBOC and the Chinese regulators were giving negative opinion about ICOs and a crack down was expected by many analysts.

Background

News that China was considering banning ICOs emerged last week when it was reported that China’s Securities and Futures Commission, the China Banking Regulatory Commission and other regulators had met and were considering a ban on all ICOs until concerns about risks were addressed.

The decision to ban ICOs came into force over the weekend. A top-level ICO conference scheduled to be held in Beijing was canceled and major ICO trading platforms were informed by regulators that all ICOs are now officially banned because they were involved in illegal money raising.

Among those confirmed as complying with the ban is bitcoin exchange BTCChina,which according to local media only launched support for ICOs last week. Another ICO exchange, called ICOINFO, ceased trading.

NIFA Warning on ICO

First on August 30 National Internet Finance Association of China (NIFA) issued a warning statement about the dangers of initial coin offerings (ICOs). NIFA is a self-regulatory organization established by the People’s Bank of China (PBoC), and in its statement

Which translates to below statement:

Some institutions at home and abroad use misleading propaganda means to ICO in the name of engaged in financing activities, the relevant financial activities without any permission, which is suspected of fraud, illegal securities, illegal fund-raising and other acts. The majority of investors should remain vigilant, beware of being deceived. Once found to have involved in illegal acts, should immediately submit to the public security organizations.
As ICO project assets do not have a clear legal standing, hence not appropriate for regular investors, there is serious shortage of information disclosure, also such investment activities face greater risk. Investors should be careful and do proper due deligence to take such investment risk.
China Internet Finance Association member units should take the initiative to strengthen self-discipline, to resist illegal financial behavior (i.e. ICO).

PBOC Circular on Banning ICO

The People’s Bank of China Central Office of the Ministry of Industry and Information Technology Ministry of Industry and Commerce, Banking Regulatory Commission, China Insurance Regulatory Commission on Sept 4 issued a joint circular on the prevention of the risk of tokens issued financing.The circular was terse, hard and direct and and declared ICOs illegal and directed companies and institutions against issuing virtual currencies.

The circular can be translated as below:

The issuance of tokens, including the first tokens (ICO) financing activities currently hapenning in large numbers involving speculation are suspected of engaging in illegal financial activities are seriously disrupting the economic and financial order.

In accordance with the Chinese laws such activites & institutions are “illegal financial institutions and illegal financial business activities,” and other laws and regulations, the relevant matters are as follows:

According to essential properties of the custody financing activities

Financing through the token sale is illegal, solicitation to investors to raise Bitcoin, currency and other so-called “virtual currency” is essentially a non-approved illegal open financing behavior. Such schemes are suspected of illegal sale of Tokens, illegal securities issuance and illegal fund-raising amounting to financial fraud, pyramid schemes and other criminal activities. Anyone involved in such activities can face criminal action.

The tokens or “virtual currency” used in token 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. No organization or individual may engage in unauthorized custody financing activities.As of the date of this announcement, all types of currency issuance financing activities shall cease immediately. The organizations and individuals who have completed the financing of the tokens should make arrangements for repatriation and reasonably protect the interests of investors and properly handle the risks. The Government will investigate and initiate legal proceeding on all ongoing and past token issues as they are deemed illegal financial activity.
As at the date of this announcement, any so-called tokens financing trading platform shall not engage in the exchange of legal currency and tokens, “virtual currency”, and may not be traded or sold as a central counterparty to sell tokens or “virtual currency”
For the tokens or “virtual currency” they should not provide pricing, information services and other services.
For the existence of illegal problems on behalf of the coin-financing trading platform, the financial management department will be submitted to the telecommunications authorities in accordance with the law to close their website platform and mobile APP, submitted to the network of mobile APP in the application store to do the next frame disposal, and brought the business administration in accordance with the law Revoke its business license.
Financial institutions and non-bank payment institutions shall not carry out business related to tokens financing & “virtual currency” transactions. They should not directly or indirectly provide financing and “virtual currency” to provide account opening, registration, trading, liquidation, settlement and other products or services. Also tokens and “virtual currency” shall not be covered for insurance business or the tokens and “virtual currency” into the scope of insurance liability.
The public should be highly alert to the risk of ICO & cryptocurrency issuance & financing and trading risks including false asset risk, risk of business failure, and risk of investment speculation. Investors are required to bear the risk of investment.
Financial industry & organizations should follow the correct policy interpretation and urge its members to resist from illegal financing activities related ICO and the “virtual currency”, and do proper investor education and jointly maintain the normal financial order.

To summarize it means that all kinds of fundraising involving ICO are now illegal in China and the current, past and future ICO have been directed to repay the funds raised to the investors. Also the trading of tokens against currency is banned which means exchanges which have been exchanging fiat with BTC or other altcoins or tokens will now be barred or banned from doing so. Also all organization and companies have been warned not to engage in ICO or token sale and involve in “virtual currencies”. Even it bans Banks and other financial institutions in opening or supporting transactions via tokens or “virtual currencies” which puts to question the whole idea of Chinese support to Blockchain technology and puts a big question mark to many Chinese cryptocurrencies and blockchain platforms like Neo, Bytom, Binance, HCash and many others.

Current Investigations

In July, the state news agency Xinhua cited data from a government organization that monitors online financial activity to report that there had been 65 ICO s so far during the year.

Chinas Remediation Office of Risks in Internet Finance has ordered that all ICOs in the country be investigated by local regulatory authorities.It has asked local regulators to inspect 60 major platforms. Chinese regulators are about to start a campaign related to the country’s initial coin offerings (ICO), authorities said they have banned new projects that raise cash or other virtual currencies through cryptocurrencies. A list of 60 major ICO platforms were provided for local financial regulatory bodies to inspect and report on, according to Caixin.

Impact on Markets

For Bitcoin, rough patch has been present for a few days now and it seems we are going to see a lower Bitcoin price in the coming hours. As one would expect, this negative Bitcoin price momentum is also affecting all other cryptocurrencies in the market right now. One of the major reasons is the recent crackdown of Chinese regulators on virtual currencies and ICOs which also seems to be affecting Bitcoin price owing to the negative market sentiment.

On BTCC China, one of the country’s biggest digital currency exchanges, price charts showed ethereum down by about 8 percent after the news and bitcoin off some 5 percent.

Most of the chinese cryptocurrencies were in deep red with some loosing their value in double digits with some investors raising concern that many of these currencies will be liquidated.

Specifically the Chinese Crypto currencies have lost value in double digits:

One of the biggest looses has been NEO and few investors are now raising questions to the founders as to how they plan to address this issue as NEO had just recently rechristened as the first Blockchain platform of China.

An Open Letter to DA and NEO from NEO

But like earlier reddit posts from investors on clarifications from Neo team, either they have been ridiculed or serious FUDed. Even some of the posts on Neo Reddit forum can be found where they explain why this is a great time to invest in NEO and why there is nothing to worry about the latest circular.

Impact on current & Future ICOs

After the Chinese government set out guidelines on ICOs and money capital raising, NEO-based decentralized platform Red Pulse has decided to blacklist Chinese citizens from its upcoming ICO. As a measure of ensuring that Chinese citizens will not be taking part in the ICO, they will have a pre-registration KYC, that will require passport information. Anyone who fills out the form, and whose passport information is okay, will have a chance to participate in the ICO.

https://twitter.com/red_pulse_china/status/902480568616673280

This means that Chinese citizens will now join the increasingly growing blacklist. United States Citizens and Singaporeans make up the rest of the list following regulations from the SEC and MAS.

Conclusion

While in many forums investors and the ICO founders are acknowledging that this was long time coming and that despite the initial ban on Bitcoin, still Bitcoin trading has fostered and after initially banning Bitcoin China chose to regulate it. But it should be a cautionary note to all other investors given that lot of investors internationally have been interested in trading in Chinese Crypto currencies and in Chinese exchanges. The regulatory ban in China still persists on Crypto currencies and they are on tenterhook and which can anytime face crackdown from Chinese Government. Also while many Chinese founders and ICO teams may say not to worry or they are working with Chinese government but no one knows what is the reality and they should take the current news and the past crackdown and double speak from Chinese regulators like PBOC on Crypto currencies with a pinch of salt and should be very wary of doing long term investment in Chinese exchanges.

Reference

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