On September 4, 2017, the People’s Bank of China (PBoC) and several associated Chinese government agencies announced that initial coin offerings (token offerings) are prohibited. The ban is effective immediately.
News of the ban caused temporary price dips for bitcoin and Ether. In addition to causing turmoil in the cryptocurrency market, the PBoC’s determination may spell trouble for token-based companies with Chinese ties as regulators increasingly scrutinize their activities.
Chinese authorities appear concerned about a myriad of issues, including “illegal sale [of] tokens, illegal securities issuance and illegal fund-raising, financial fraud, pyramid schemes and other criminal activities.” The joint statement also spoke to the importance of strengthened judicial cooperation and “strict law enforcement.”
Significantly, Chinese regulators demanded the return of funds previously raised through token offerings.
“The organizations and individuals who have completed the financing of the tokens should make arrangements for repatriation and so on, reasonably protect the interests of investors and properly handle the risks.”
The statement also warns of potential punishment for non-compliance.
It’s unclear whether the Chinese authorities have noted any differences between tokens that are merely alternative currencies and those that provide some form of utility. This is a vital distinction, especially for those involved with Ethereum-based organizations.
The Chinese announcement comes shortly after related guidance by the US Securities and Exchange Commission. As the cryptocurrency market expands, it will be critical for regulators to distinguish between virtual currencies and utility tokens. Emerging companies and technologies might not fit within existing frameworks.