This week China sent digital currencies into a tail spin by issuing the harshest denouncement of cryptocurrencies and other decentralized ledger technologies of any country to date. In a statement from the People’s Bank of China1, China flatly outlawed all Initial Coin Offerings, stating that they are “a kind of non-approved illegal open fund raising behavior, suspect of illegal sale tokens, illegal securities issuances, and illegal securities issuance and illegal fund-raising, financial fraud, pyramid schemes and other criminal activities.”2 While the industry had advanced notice that China was going to issue some restrictions on digital currency trades and Initial Coin Offerings, the outright ban of ICOs exceeded expectations. And, while the global digital currency trade was negatively impacted, capital raisers who have recently relied on ICOs for fund-raising are undoubtedly the hardest hit.
Translation issues aside, the core of the September 4, 2017 directive was clear--China has banned all fundraising efforts through the sale of digital tokens.
Unfortunately the details beyond the ban are less clear. For parties who have already completed Initial Coin Offerings, Chinese regulators have directed those parties to “make arrangements such as refunding crypto assets to investors to protect investor rights, and to deal with the risks properly.”3 Punishment mechanisms seem equally vague. Regulators appear committed to investigating and criminally punishing future token raisers and “those whose completed token fundraising activities” are found to have violated “the law or regulation” -even though the law has not yet been articulated.
The proclamation did not stop with the issuers of the digital tokens. Moving forward, all cryptocurrency exchange platforms are prohibited in China from: (a) offering exchange services between fiat currency and tokens; (b) buying or selling tokens for cryptocurrencies; (c) acting as a central party facilitating the trading of tokens for cryptocurrencies; and, (d) providing price bidding or middlemen services for the exchange of tokens for cryptocurrencies.4 The expectation is that these restrictions will soon be made applicable to all or most other Chinese financial service providers.
Just as significant, China directed all financial institutions to not provide account opening, registration, trading, clearing and settlement services for token fundraising activities, nor underwrite or provide coverage under any insurance policy relating to ICOs. China also instructed financial industry organizations to voluntarily fight against any illegal financial activity that “relates to token and cryptocurrency fund raising.”
On the same day of the PBOC statement, the PBOC’s Beijing business management department for banks and payment agencies issued a notice requiring the implementation of clean-up and rectification work involving ICOs to strengthen the payment and settlement markets.5 Financial institutions and service providers were ordered to identify large or high-frequency funds involved in such offerings and report to regulators suspicious anti-money laundering activities. This suggests that China will engage in on-going efforts to unwind prior digital token capital raises and freeze funds acquired in such offerings.
In addition to China’s stated concern for its domestic investors, China is suspected to have capital control motives behind these recent actions. Cryptocurrencies have had some of their most prominent use in cross-broader money transfer and remittance transactions, including to a large extent by individuals seeking to move capital outside of China – which some have seen as a circumvention of China’s capital control efforts. Not surprisingly, as of the publishing of this article, Reuters just issued a report that China will be shutting down “key” Chinese-based cryptocurrency exchanges.6 Obviously, this recent development will further negatively impact the industry, at least over the short term.
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1 Other Chinese Regulators, including the Central Network Office, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, and the China Banking Regulatory Commission, joined in issuing the statement.
2 http://www.miit.gov.cn/n1146290/n4388791/c5781140/content.html
3 Id.
4 Id.
5 http://www.thepaper.cn/newsDetail_forward_1784511
6 https://www.reuters.com/article/us-bitcoin-china/bitcoin-tumbles-on-report-china-to-shutter-digital-currency-exchanges-idUSKCN1BJ1US
