Cryptocurrency markets tumbled on Monday after the People’s Bank of China declared initial coin offerings (ICOs) a form of illegal fundraising.
China’s decision is intended to stop scams and improve the market. Nevertheless, analysts admit that ICOs are here to stay.
ICOs are a new type of fundraising campaign unique to cryptocurrencies. They’re like a combination of crowdfunding with traditional initial product offerings (IPOs). Companies seeking to raise money will sell a digital currency – similar to bitcoin – in exchange for cash or an established digital currency (like Ethereum or Bitcoin).
2017 has been the year of the ICO. Estimates vary, but since 2014, companies worldwide have raised roughly $1.78 billion through ICOs.
Nevertheless, ICOs are notoriously unregulated. There’s no certification required from the company, nor are investors required to be accredited. This deregulation means investors are at the mercy of the internet. Many ICOs have been scams. Others have been poor investments that would have been ignored in the conventional investment world – like companies with a bunch of good ideas but no real product or development path in place.
What Does This Move Mean For The Future Of ICOs In China?
“There's no secret that a lot of the initial coin offerings, with ads on Facebook promising huge discounts and returns, are nothing but a scam,” said Sasha Ivanov, CEO of Waves, in an email interview conducted by CNBC.
“The Chinese government could cope with those companies working in a shadow zone of the law, but they have finally lost patience, as more and more companies tried to raise millions for nothing.”
The ICO ban has struck at the worst time for cryptocurrency investment company Blackmoon Crypto, which recently raised more than $9 million in an ICO pre-sale. That company halted its planned promotional activity within China, and will prohibit Chinese citizens from taking part in its token sale, which is scheduled to start on September 12. Any Chinese citizens who took part in the pre-sale will receive a refund.
Obviously, Blackmoon Crypto isn’t the only company currently going through an ICO. Other companies are expected to take similar action.
The problem with ICOs is that token holders have various rights. Some tokens pay out dividends based on quarterly profits – similar to conventional securities that are regulated by every country around the world. Other tokens are utility tokens, designed exclusively to be used on the company’s platform. And some tokens are just “thank you” symbols. Coins can be found across the entire spectrum.
The important thing to do now is to decide where on the token spectrum regulators in China will draw the line.
What Does The Future Hold For Cryptocurrencies?
In the meantime, cryptocurrencies plummeted across the board after China’s plans were announced on Monday. Bitcoin dropped to a low of around $4,000, but has since recovered to around $4,500, as of Wednesday. NEO, which has been described as China’s Ethereum, plummeted nearly 40% at one point in the day.
Ultimately, some governments will embrace token sales and cryptocurrencies, while others will try to shut it down. The good news is that currencies like bitcoin cannot be shut down. Thanks to the internet and cryptography, cryptocurrencies are here to stay.