Tech Transformers

China ICO ban will help prevent crypto scams but could create regulatory competition, experts say

Key Points
  • China banned initial coin offerings (ICOs) earlier this week in a move to prevent money laundering and illegal activities.
  • ICOs allow organizations to raise investment by selling new cryptocurrencies, which are similar to bitcoin.
A marble lion in front of the China Banking Regulatory Commission (CBRC).
Zhang Peng | LightRocket | Getty Images

China's banning of initial coin offerings for new digital currencies may stop scams and improve the market but these ICOs are very much here to stay, industry experts told CNBC.

ICOs allow organizations to raise investment by selling new cryptocurrencies, similar to bitcoin, in return for cash or other established digital currencies. However, the People's Bank of China ruled earlier this week that the practice, which has become popular around the world, as well as in China, constitutes illegal fundraising.

Around $1.78 billion has been raised through ICOs since 2014, according to data from the CoinDesk ICO tracker. However, a major issue is that many ICOs could be scams, with no hope of backers receiving a return on their investment.

"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 blockchain company Waves, in an email.

"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."

Ivanov says the move will be helpful for the industry, and predicts that regulated ICOs will be allowed in China in the future.

One company affected by the ban is online lending platform Blackmoon Crypto. It recently raised more than $9 million in an ICO pre-sale. The company has now halted its planned promotional activity within China. It will also prohibit Chinese citizens taking part in its token sale on September 12 and will refund citizens who took part in the pre-sale.

"Blackmoon Crypto will continue to take very seriously all initiatives of global regulators and will comply with the upheld requirements. As a professional in the industry, we welcome the cleansing of the market from scrupulous participants and are ready to cooperate with regulators," said the company's CEO Oleg Seydak in an email.

The purpose of ICOs

Part of the problem regulators may have is that ICOs cover a wide range of activities, according to Linus Lindgren, strategic investor and advisor at BTCXIndia.

"One side of the spectrum would be to sell parts of future revenue of a company via issued tokens to investors who look to speculate in the value of such tokens. The other side of the spectrum could be charities issuing 'thank you' tokens in exchange for donations. In between, there are many varieties and mixes of these," he told CNBC via email on Monday.

"The discussion to be had now is where on the 'token spectrum' regulators will draw the line, and where and how these activities should be regulated."

The move by China received mixed reactions. Cryptocurrencies fell on the move as it created negative market sentiment. hit a low of $4,037 on Tuesday but has recovered to around $4,500 on Wednesday.

Some, such as David Moskowitz, co-founder and CEO of blockchain-powered social network Indorse, welcome the move as a way to protect consumers from fraudulent ICOs.

"We hope the authorities will recognize the potential of the sector for economic growth and technological development, and enact rules which will allow for the safe and secure future of the industry," he said in an press statement.

Others were more skeptical, pointing out that the ban could lead to competition with other countries that are more welcoming for ICOs.

"Some governments and incumbents will try to shut down this movement, and come to unreasonable extremes in order to do so. However, thanks to the internet and cryptography, there's no going back," said Luis Cuende, co-founder and project lead at blockchain developer Aragon, in an email.

"Eventually, some other governments will embrace token sales and crypto in general, creating jurisdictional competition, and forcing the incumbents to be reasonable."

Should you invest in a cryptocurrency?

Should you invest in a cryptocurrency?