The Chinese government has just declared initial coin offerings to be an illegal form of financial activity, mandating a ban on cryptocurrency crowdfunding as well as calling for trading platforms to compensate investors under certain circumstances.
On 2 September the Internet Financial Risk Special Rectification Work Leadership Team Office (互联网金融风险专项整治工作领导小组办公室) issued its “Notification Concerning the Undertaking of Clean-up and Rectification Work for Coin Issuance Finance” (关于对代币发行融资开展清理整顿工作的通知) (Rectification Office Letter (2017) No. 99) to the financial offices or departments of all China’s province-level governments.
The notification states that ICO’s are “intrinsically categorised as unapproved illegal public financing, involving illegal fund-raising, illegal issuance of securities, illegal sale of coins…as well as involving illegal criminal activities such as financial fraud and pyramid selling, that severely disrupts the economic and financial order.”
According to Notification 99 ICO’s as well as other forms of finance involving cryptocurrencies have seen surging growth and associated rampant speculation of late, and that for this reason the government has included cryptocurrency financing within the remit of “Internet financial risk special rectification work.”
The notification mandates the suspension of all new ICO’s and the establishment of mechanisms to strictly monitor crypocurrency financial activity, in order to prevent any future recurrence.
The notification also calls for the launch of comprehensive, nation-wide investigation into cryptocurrency crowdfunding throughout China, including ICO’s that have already been completed.
The release of the notification closely follows the circulation of reports in the Chinese media claiming that regulatory figures had called for a ban on all ICO’s as soon as possible, on the grounds that they represent an illicit form of risk-fraught financial activity.
The day following the release of the notification one of China’s biggest Bitcoin exchanges, BTC China, announced that it would suspend all future ICO’s.
Other Chinese cryptocurrency platforms that have suspended ICO services include ICOINFO and ICOAGE, both of which are ranked amongst China’s top three ICO platforms.
Senior executives of cryptocurrency exchanges to be placed under surveillance
Notification 99 requires that China’s local governments conduct investigations into cryptocurrency financial activity within their own jurisdictions, and that all trading platforms and exchanges submit reports to local financial regulators prior to end of business on 4 September, in order to gather data on financial entities and their senior executives, as well as financing amounts and timeframes.
The central government has also issued a list of 60 ICO platforms to all local governments to serve as the basis for further investigation into regional cryptocurrency financial activity.
The notification calls for local governments to place the senior executives of ICO platforms situated within their jurisdictions under “monitoring and control,” and when necessary freeze accounts or take measures to prevent cryptocurrency trading platforms from absconding with assets.
China’s ICO sector has also expressed trepidation and concern about the notification’s call for organisations or individuals that have engaged in cryptocurrency financing to perform “repayment and appropriate risk disposal” should investigations by local regulators require it.
Notification 99 brings an end to China’s nascent ICO boom
China’s ICO sector has seen flourishing growth in the several years since cryptocurrencies were first used for crowdfunding purposes.
According to the “2017 First Half Domestic ICO Development Situation Report” (2017上半年国内ICO发展情况报告) issued by the National Committee of Experts on Internet Financial Security Technology, China saw a total of 65 ICO’s in the first half of 2017 raising a total of 2.616 billion yuan, with a secondary market whose transaction volumes exceeded 100 billion yuan.
The surging growth in crypocurrency trading and finance has raised hackles amongst Chinese regulators, particularly given concerns that fraudulent activity such as pyramid selling has been a key driver of growth.
Caixin reported last month that a slew of central government ministries and commissions had launched investigations into China’s ICO sector, culminating in the issuance of an emergency report to China’s central bank on 21 August stating that many ICO’s were forms of illegal finance.
Regulatory agencies reportedly concluded that as many as 90% of Chinese ICO’s involved illegal fund-raising and wilful fraudulence, and that of as little as 1% of the funds raised by ICO’s successfully made their way to actual blockchain investments.
A large volume of ICO’s are used by financing parties for the purpose of averting the constraints of the”Securities Law,” and the “Regulations on Disposal of Illegal Fundraising,” while many ICO projects do not involve any registered companies.