By Ashna Bhutani
Token based Initial Coin Offerings (ICO) have been banned by the People’s Bank of China, according to an August 30 report by the National Internet Finance Association of China (NIFA).
An unregulated means of crowd funding, Initial Coin Offerings (ICO) came out of the blue as a bonanza for entrepreneurs in China and elsewhere in the world. ICOs are used by startups to avoid the rigorous capital-raising process offered by banks or venture capitalists. An increasing number of tech companies began to sell the digital currency, thereby making the market bigger and bigger. This trend grew earlier this year. However, the People’s Bank of China took a step to burst this bubble. They banned ICOs and declared the practice as illegal.
The previous crackdown on Bitcoin
A cryptocurrency refers to digital assets that work as a medium of exchange using cryptography. The legality of cryptocurrency is a debatable matter. The most widely used cryptocurrency, the Bitcoin is considered illegal in many countries, while many others accept it.
In 2013, China banned the Bitcoin. Countries ban cryptocurrency on the grounds that they may lead to money laundering. Allowing third party funding from unknown sources may increase risks such as terrorist financing. In January this year, the central bank of China sent out a warning to all digital currency exchanges, that they would be shut down if they violated any money-laundering rules.
The rise and fall of ICOs in China
The relatively new phenomenon of issuing ICOs raised close to $395 million in 2017. The birth of ICOs allowed investors to jump into an unregulated sphere, thereby making a lot of profits. Investors say that it is risky, but also profitable. The value of the digital token keeps increasing, as long as others continue to invest. However, the People’s Bank of China stepped in to ensure that this mechanism does not lead to terrorist financing or disrupt social order.
The NIFA threw light on the fact that the chances of fraud are high since ICOs allow illegal securities, illegal fundraising and other acts. Financial institutions have been warned against the activity and individuals who have already participated in ICOs are expected to seek refunds.
Dark days ahead for digital currencies?
Digital currencies have slipped after this ban by the Chinese government. The crackdown on the digital cryptocurrency market led to a slump in the Bitcoin. The value of Bitcoins fell in the market by $300.
Moreover, China’s ban on ICOs is not the last of its kind. The Monetary Authority of Singapore recently warned about the risks that ICOs entail. Canada followed with a similar warning. If one country after another bans ICOs, it will bring the entire cryptocurrency market to a halt.
The organiser of the ICO project, Mr Bussman, believes otherwise. He is claiming that this is not the end of ICOs. “The initial coin offering is a new business model leveraging blockchain technology and it will remain,” he said. He also said that once there is a regulatory clarity, the token based currency would continue to function.
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