Chinese regulators said the use of initial coin offerings (ICOs) to raise money amounts to illegal fundraising which could destabilise the Chinese economy.
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Companies use ICOs, which is a combination of crowdfunding and cryptocurrencies, to raise money by offering investors a digital token in exchange for money.
This is unregulated and used by many tech startups to raise money quickly. Unlike initial public offerings, where investors gain shares in the ownership of the company, ICOs offer coins of the company, which can appreciate in value.
Research by website Coindesk found over $1.5bn in capital has been raised through ICOs since the start of the year, compared with $256m last year.
A translation of a statement from Chinese regulators, including the People’s Bank of China on Coindesk, said:
“ICO financing refers to the activity of an entity raising virtual currencies, such as bitcoin or ethereum, through illegally selling and distributing tokens. In essence, it is a kind of non-approved illegal open-fundraising behavior, suspected of illegal sale tokens, illegal securities issuance and illegal fundraising, financial fraud, pyramid schemes, and other criminal activities.”
Chinese regulators want investors to be fully refunded for money raised through ICOs, and the ruling could be bad news for tech startups looking to raise funds quickly.
China is not alone in warning of the risks associated with ICOs. Singapore’s financial services regulator, the Monetary Authority of Singapore (MAS), recently said:
“ICOs are vulnerable to money laundering and terrorist financing risks due to the anonymous nature of the transactions, and the ease with which large sums of money can be raised in a short period of time.”