China’s clampdown on cryptocurrencies and the subsequent trading halts on a number of crypto exchanges have caught hundreds of mainland investors unaware and unprepared, driving some entrepreneurs to seek alternative listing of their tokens in Hong Kong to raise funds.
Cryptos, a form of virtual currency created using computer cryptography, have been under China’s regulatory scrutiny since the start of 2017, due to its explosive growth that’s raised concerns that a meltdown of the unregulated market could spill over to financial losses. The ruling Communist Party, scheduled to pick its line-up of leaders for the next five years on October 18, is anxious to maintain social and financial stability ahead of its election.
Smack in the centre of the Chinese regulators’ cross hairs were initial coin offerings (ICO), an unregulated practice of raising capital through issuing cryptocurrencies called tokens, often exchangeable for more established cryptos such as bitcoins or ethers, which can in turn be bartered for products, services, or cash.
What is an ICO, and why is China’s central bank banning it?
Cryptos aren’t legal tender in China, and the central bank has an outright ban on banks or financial institutions holding them, although individuals are allowed to own them.
As many as 65 ICO projects were completed in China in the first seven months of 2017, raising an estimated 2.6 billion yuan (US$398 million), according to the Beijing Internet Finance Association. The Chinese central bank said 90 per cent of the ICOs launched on the mainland were fraudulent, and banned all ICOs on September 4.
Since then, virtual currencies of all types have plunged in value. Bitcoin and Ethereum, the two largest cryptocurrencies by value, declined more than 24 per cent since last week.
“Cutting flesh” was how a bitcoin owner in Fujian province described his feeling, as he watched his investment shrink in value.