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China says ICOs are essentially illegal
 
Initial Coin Offering (ICO) is the process of allotting cryptocurrency tokens by the company to raise the predetermined project capital from investors. Photo: cryptomudra.com
 
China has said the “initial coin offerings” or ICO, the block chain community’s version of crowd funding, is an unauthorized fundraising tool which is illegal, and any fundraising through ICO activities must be stopped immediately, according to a report by Caixin on Monday. 
 
A notice issued by a working committee that oversees risks in China’s Internet finance sector on Saturday said ICO projects which raise virtual currencies through crypto currencies may involve financial scams and have seriously disrupted economic and financial order.
 
The committee which includes government administrations such as the People’s Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission was formed in 2016 as China began to crack down on illegal fundraising activities in the booming Internet finance sector. 
 
An ICO is similar to a stock IPO, but instead of buying shares in the company, investors are buying digital "tokens" used on crypto currency platforms. Companies built on block chain, a digital database for recording financial transactions and other types of deals, raise money by selling these tokens, which can typically be used to pay for goods and services on their platform, or just stashed away as investments.
 
The current popularity of ICOs to a certain extent can be attributed to the success of Ethereum, a block chain-based platform for software developers that conducted the first ICO. It is reported that ether tokens are used to run software applications on the Ether network, and can also trade on the secondary market.
 
Chinese President Xi Jinping has called “financial security” a top policy priority this year, and regulators think ICOs pose a threat to social and economic order, can create hidden financial risks and harm investors’ interests. 
 
The notice said ICOs are “essentially a form of non-approved illegal public financing behavior and raises suspicions of illegal fundraising, illegal securities issuance, illegal sale and raising of tokens, financial fraud, illegal marketing and related criminal activity.”  
 
While authorities will ban all new ICO projects, organizations and individuals that have completed fundraising through ICOs should make relevant arrangement to return funds, in order to protect the interests of investors and properly deal with risks, according to notice. 
 
The committee also provided a list of 60 major ICO platforms for local financial regulatory bodies to inspect. 
 
Several Chinese ICO platforms have already halted their services in the past week. ICOINFO, for instance, has said on its website that it was voluntarily suspending “all ICO-related functionality on the site” until it received clarity on the shifting regulatory environment. BTCC, a Shanghai-based bitcoin exchange platform, has also suspended its ICO-related businesses during the weekend.
 
Chinese authorities also shut down a block chain conference during the weekend out of concerns over ICOs being used to raise funds illegal, Caixin reported. 
 
Last week, China’s National Internet Finance Association warned ICO investors to be cautious about fraud. 
 
In July, the United States Securities and Exchange Commission (SEC) said that the tokens can be considered securities and may need to be registered unless a valid exemption applies. 
 
Following that comment, last week, the SEC issued a warning about potential ICO scams and “pump and dump” schemes by public companies, aiming to alert investors about the risks of investing in public companies that promote ICOs and deliberately “pump” the prices of their offerings with “new and emerging technologies.”
 
Besides the speculation on the growth of assets, part of the appeals of ICOs is that early-stage startups can use them to raise money without undergoing scrutiny they have to in the case of a traditional fundraising mode, such as when approaching venture capital investors.
 
 

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