The People's Bank of China (PBoC) has announced an immediate ban on initial coin offerings (ICOs)declaring them illegal and a threat to financial stability.
Initial coin offerings, which employ the use of cryptocurrencies, have become a popular means of fundraising for startups in recent months. The use of digital technology and current lack of any regulation allows entrepreneurs to raise money quickly in return for what have been described as digital stock certificates.
Just as with stocks, the value of the issued coins increases with the success of the startup. The ICOs also employ blockchain-based technology, enabling issuing companies to raise funds without using venture capitalists, investment bankers and other intermediaries associated with traditional fundraising.
More than $1.6bn has been raised worldwide from ICOs. The number of ICOs in China has also risen sharply with 65 ICOs raising almost $400m from 105,000 individuals so far this year.
However China's central bank has ruled that ICOs disturb financial order and shall be banned. The PBoC, along with the securities and banking regulator and other government agencies, announced that any individuals or organisations that have completed ICO fundraising should make arrangements to return the funds.
The PBoC is not the only authority to look into the developing ICO market. The International Monetary Fund issued a staff note in June that speculated about the legal impact of ICOs.
Meanwhile a number of central banks, including the PBoC, continue to explore the viability of issuing their own digital currencies.