China’s move last week to ban initial coin
offerings (ICO) has caused chaos among start-ups looking to raise money
through the novel fund-raising scheme, prompting halts, about-turns and
re-thinks.
China is cracking down on
fundraising through launches of token-based digital currencies,
targeting ICOs in a market that has ballooned this year in what has been
a bonanza for digital currency entrepreneurs.
The boom has fueled a jump in the value of cryptocurrencies, but raised fears of a potential bubble.
“This
is not unlike the dotcom bubble of 2000,” said a partner at a venture
capital fund in Shanghai, who didn’t want to be named because of the
issue’s sensitivity. “There are a lot of companies raising a lot of
money for not very good ideas, and these will eventually be weeded out.
But even from the big dotcom bust, you still have gems.”
“One
of the reasons regulators stepped in was that the ICO fever extended
beyond the traditional crypto community. The timing was an attempt to
pre-empt this before it goes into a much broader mass market in China,”
the partner said.
Investors in China
contributed up to 2.6 billion yuan ($394 million) worth of
cryptocurrencies through ICOs in January-June, according to a state-run
media report citing National Committee of Experts on Internet Financial
Security Technology data.
Pre-ICO roadshows
featuring elaborate standing room-only presentations at 5-star hotels
drew a diverse crowd, including grandmothers - a likely tipping point
for regulators.
The hype and subsequent
crackdown came as China focuses on economic and social stability ahead
of next month’s congress of the Communist Party, a once-in-five-years
event.
Beijing is also waging a broader
campaign against fraudulent fundraising and speculative investment,
which analysts attribute to China’s underdeveloped financial regulation
and lack of legitimate investment options.
While
several start-ups said the exuberance had got out of control and they
had expected Beijing to act, they said last week’s move panicked
investors and caused confusion.
Mi Huijin, for
example, said he had just got off a train to Shanghai after closing a
deal for his Singpay blockchain start-up when he switched on his phone
to a flood of messages about the ban. He summoned the host of a popular
live-stream channel to the railway station to calm his followers in a
40-minute broadcast.
“Everyone
shouldn’t panic. If you’ve nothing to be guilty of what’s there to be
scared of?” he told the roughly 800,000 viewers. “After reviewing the
regulations, I feel it’s a good thing.”
Not
everyone was convinced. While some comments below his video asked if
Singpay would offer refunds, others warned that some users had reported
the start-up to police.
China’s position -
which differs from regulators elsewhere, who say ICOs may be securities
and thus subject to regulation - remains open to interpretation.
Hu
Bin, deputy director of the finance institute at the China Academy of
Social Sciences, an institution directly under the State Council, or
cabinet, has said this is a “stop on ICOs, not a ban. What are we
stopping? Illegal ICOs.”
Hu said China recognized there is real demand for ICOs, but wants to prevent them being used for speculation.
“It’s
entirely proper for the Chinese government to seek protection for
consumers and prevent fraud, (but) confining capital raising to a
specific established sector of finance ... is to ignore the enormous
societal value that blockchain technology can present,” said Alex
Bessonov of BitClave, a Silicon Valley-based blockchain company, which,
he said, is now discouraging Chinese investors.
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