China’s regulators preparing new rules for digital coin offerings

A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture shot May 27, 2015. REUTERS/Benoit Tessier/Illustration/File Photo

Chinese regulators are preparing new regulations on digital coin offerings and may ban them until the rules are in place, the financial magazine Caixin reported on Monday, as interest in the new fundraising channel grows rapidly in a regulatory grey area.

Digital currencies, also called cryptocurrencies, such as bitcoin and a growing stream of alternatives, allow anonymous peer-to-peer transactions without the need for banks or central banks.

They are also used by companies seeking to raise capital, in the form of initial coin offerings (ICOs) or initial token offerings (ITOs).

The currencies exist in a legal grey area, however, with regulators scrambling to come up with rules that will not stifle innovative funding models while also protecting investors.

ICOs have become a bonanza for digital currency entrepreneurs, allowing them to raise millions quickly by creating and selling digital “tokens” with no regulatory oversight.

But Chinese regulators, including the People’s Bank of China and the China Securities Regulatory Commission, are now considering how to handle ICOs, including whether to ban them outright until regulations are in place, Caixin reported citing sources.

The report on China’s plans follow comments from the United States Securities and Exchange Commission (SEC) in July that the tokens can be considered securities, and therefore, may need to be registered unless a valid exemption applies.

The PBOC and CSRC did not immediately respond to requests for comment.

The popularity of coin offerings has surged in China this year, with 65 ICOs and 2.62 billion yuan ($394.6 million) raised from 105,000 individuals in the country, state-run Xinhua reported in July citing data from a government organization that monitors online financial activity.

Marketing events for an upcoming ICO held over the weekend at five-star hotels in Beijing and Shanghai saw standing-room only crowds with several hundred prospective investors at each event.

The government issued draft rules targeting illegal fundraising on Thursday, as the authorities step up a campaign to crack down on risky and illicit behavior in the country’s financial sector.

In China’s rapidly developing financial markets, regulators periodically crack down on what they deem to be illegal fundraising schemes, including online peer-to-peer (P2P) lending platforms and pyramid schemes.

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