China bans cryptocurrency ICOs

The country's central bank says Initial Coin Offerings are "disrupting" financial order.

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China has clamped down on cryptocurrency trading and financial deals away from the central bank by banning Initial Coin Offerings (ICOs).

ICOs have been hyped as the next big thing in the world of cryptocurrency. The offerings, also known as token sale events, are an unregulated way for startups and established businesses to raise funds.

In return for investor cash, the organizations involved offer virtual coins -- recorded over the blockchain -- rather than traditional company stocks and shares. These coins, such as Bitcoin or Ethereum, can then be traded on cryptocurrency exchanges.

However, China has had enough of dealings not under the censorship-heavy country's control. A recent ruling from the People's Bank of China called ICOs "illegal" and as the offerings are often based on speculation, regulators say they are likely linked to "illegal financial activities [which] seriously disrupt the economic and financial order."

In a statement, the Chinese central bank said that ICOs are "essentially a non-approved illegal open financing behavior, suspected of illegal sale Tokens, illegal securities issuance and illegal fund-raising, financial fraud, pyramid schemes and other criminal activities." In addition, the regulators claim that ICO events have caused "market chaos."

This is how China views the events, at least. ICOs can also provide much-needed finance to get a startup off the ground, but do not come without risk.

There is the possibility of scams, but in recent times, it is cybersecurity issues which have caused the most heartache for would-be investors attending ICOs.

In July, the CoinDash ICO dissolved into chaos when a hacker compromised the organization's website and fraudulently made off with $7.4 million of investor funds, Veritaseum lost $8.4 million at the firm's ICO, and a similar attack followed against Engima in which at least $500,000 in Ethereum was stolen.

See also: Hackers strike Ethereum again, slink away with over $30 million

The central bank has demanded that any ICOs operating from China must stop immediately, and if ICOs have already taken place, organizations and individuals behind them must now make arrangement for returns and refunds. If this is not completed, Chinese law enforcement will investigate and if necessary, prosecute.

"Any so-called tokens financing trading platform shall not engage in the exchange of legal currency and tokens, "virtual currency", and may not be traded or sold as a central counterparty to sell tokens or "virtual currency," the bank states.

This should not prevent Chinese investors from being able to join in ICOs, but they must be willing to use overseas platforms -- and China-based ICOs will no longer exist unless the new laws are relaxed in the future.

However, the ruling will likely stop the recent uptick in Chinese ICO activity. In July and August this year, with roughly $766m was raised through the events during only these two months.

China is not the first country to view ICOs with trepidation. The US Securities and Exchange Commission (SEC) is currently debating whether token sales should be bound by federal securities laws, as coins may represent company shares or voting rights.

"The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us," said SEC Chairman Jay Clayton. "We seek to foster innovative and beneficial ways to raise capital, while ensuring -- first and foremost -- that investors and our markets are protected."

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