“The current regulation that’s being talked about is banning bitcoin exchanges, which would cut out a lot of the trade flows we’re seeing in China right now and the exchanges around bitcoin,” Kapron added. “So we’ll likely see them focused around those activities where there is an entity or person or some kind of connection to the traditional financial system that they can control.”
On Tuesday, reports said a senior official at China’s central bank defended the move to ban ICOs but also said the move should not stop firms from studying blockchain technology further.
The way ICOs work is fairly straightforward: Companies create and issue digital tokens that can be used to pay for goods and services on their platform or stashed away as an investment. They put out whitepapers describing the platform, software or product they’re trying to build, and then people buy those tokens using widely-accepted cryptocurrencies (like bitcoin and ethereum) or fiat currencies like the U.S. dollar.
Start-ups have raised more than a billion dollars this year in coin sales and in recent months. In China, ICOs have raised at least 2.62 billion yuan (about $400 million), Reuters reported, citing local media.
All of that is done with minimal regulatory oversight. Moreover, digital currencies are pseudonymous, decentralized and encrypted, making it harder to track each of the transactions made, and the individuals behind them. Theoretically, anyone with an internet connection and a digital wallet can be part of a coin sale event.
That, many worry, leaves plenty of room for people to launder money or finance terrorism activities and engage in other fraudulent behaviors — especially in countries where corruption is rampant.
In August, Singapore’s financial regulatory body and central bank, the Monetary Authority of Singapore (MAS), said in a missive that ICOs are “vulnerable to money laundering and terrorist financing risks due to the anonymous nature of the transactions, and the ease with which large sums of monies may be raise in a short period of time.”
The MAS also clarified that it will regulate the sale of digital tokens in the city-state if they constitute products regulated under Singapore’s securities and futures regulation.
In turn, some groups behind digital tokens have taken pains to emphasize that their cryptocurrencies are not “securities,” but rather act more like rewards program points (like airline miles). As in the case of Singapore, securities are oftentimes more stringently regulated than other kinds of assets.
Meanwhile, the U.S. Securities and Exchange Commission (SEC) provides guidelines on its website for investors to consider before participating in token sales. Some of the key points the SEC asks potential buyers to consider are ways to identify fraudulent investment schemes.
Previously, the SEC released an investigative report in which it said companies that planned to use distributed ledger or blockchain-enabled ways to raise capital must take appropriate steps to comply with the U.S. federal securities laws.
