China on Monday banned individuals and organizations from raising funds through initial coin offerings (ICO), or launches of digital currencies, saying the practice constituted illegal fundraising.
ICOs have become a bonanza for digital currency entrepreneurs, globally and in China, allowing them to raise large sums quickly by creating and selling digital “tokens” with little or no regulatory oversight.
Individuals and organizations that have completed ICO fundraisings should make arrangements to return funds, said a joint statement from the People’s Bank of China, the securities and banking regulators and other government departments, that was posted on the central bank’s website.
The prices of bitcoin and ethereum, two of the largest cryptocurrencies, slumped after the announcement.
Zennon Kapron, Director of the Shanghai-based financial technology consultancy Kapronasia, said 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.
“China, in many ways, is no different than the U.S. or Singapore in saying, ok, we need to push back on these for now until we figure out how to deal with them... I think it will be slightly a temporary measure.”
The popularity of coin offerings has surged in China this year.
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 ICOs so far during the year raising a combined 2.62 billion yuan ($394.6 million) from 105,000 individuals in the country.
Reaction was swift online.
“The music has stopped,” said one member of a chat group on the social networking platform WeChat that was set up last week for an upcoming ICO for a fundraising platform called SelfSell.
“Hurry up and sell your Bitcoin,” said another.
The organizer of the ICO project, who recently went on a six-city roadshow, said the project had been suspended.
Kapron said the new rules apparently did not take aim at Chinese investors, who would still be able to participate in offshore ICOs.
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.