ICO is included in the special rectification of Internet finance risks, and Document No. 99 starts the cleanup and rectification

On September 2, the Office of the Leading Group for the Special Rectification of Internet Financial Risks issued a notice on the cleanup and rectification of token issuance and financing to the financial offices (bureaus) of all provinces and cities, No. 99 [2017] (hereinafter referred to as Document No. 99), which clearly stated that ICO (Initial Coin Offering) is essentially an unauthorized illegal public financing, suspected of illegal fundraising, illegal issuance of securities, illegal sale of tokens for fundraising, as well as financial fraud, pyramid schemes and other illegal activities, which seriously disrupted the economic and financial order.

The main contents of Document No. 99 are: a comprehensive survey, a halt to all new ICO projects, and a case-by-case assessment of completed ICO projects to crack down on illegal and irregular activities.

ICO, a method of crowdfunding through the issuance of virtual tokens, can be simply understood as an IPO (initial public offering) in the digital currency community, but there are still huge differences between the two. In simple terms, IPO is to buy equity with legal currency; while ICO is to convert shares or income rights into cryptocurrency and sell them publicly - equivalent to participating in crowdfunding and obtaining virtual tokens, which are similar to equity without "decision-making power", but can be traded immediately to earn the difference. (See Caixin Weekly's latest report "The Dream of ICO Making Wealth Will Wake Up")

Document No. 99 points out that recently, a large number of activities in China have emerged to raise funds through the issuance of tokens, including initial coin offerings (ICOs), and speculation is prevalent. In order to prevent and resolve related risks and protect the legitimate rights and interests of investors, it is decided to include token issuance and financing activities in the special rectification work of Internet financial risks. The rectification leading groups of all regions are requested to immediately carry out the cleanup and rectification of token issuance and financing activities in accordance with the relevant work mechanism to effectively prevent and resolve related risks.

In accordance with the requirements of Document No. 99, the leading group offices of the special rectification work on Internet financial risks in various provinces immediately conveyed this notice to various districts, deployed to carry out investigations on token issuance and financing activities in their jurisdictions, and required token issuance and financing trading platforms in their jurisdictions to report the situation before the end of get off work on September 4, and copy to the banking, securities and insurance regulatory departments. The statistics include the financing subject, senior executives, financing amount, financing time, etc., in order to grasp the specific situation of the token issuance and financing trading platform and the financing subject in detail.

At the same time, the National Rectification Office provided a list of 60 ICO platforms for reference by all localities, and required local rectification offices to conduct further detailed investigations on this basis to ensure that no token issuance platforms were missed. Where no token issuance platforms were found, a "zero report" should also be issued.

Document No. 99 requires a comprehensive halt to new token issuance and financing activities, and the establishment of an activity monitoring mechanism for token issuance and financing to prevent a resurgence.

99 The article mentioned that when resolutely carrying out the cleanup and rectification of illegal and irregular activities, it means that the projects that have completed the issuance and financing of tokens, the rectification teams in various places should judge each case, according to the essence of the business, in accordance with the current working mechanism for handling illegal securities activities, illegal trading venues and illegal fundraising and the division of responsibilities of various departments, strengthen coordination and cooperation, strictly enforce the law, and crack down on related illegal and irregular behaviors. For particularly complex behaviors, the rectification teams in various places should organize relevant departments within their jurisdiction to conduct joint team cleanup and rectification.

The notice also requires the implementation of measures such as interviews and monitoring of token issuance platform executives and their accounts to protect the interests of investors, prevent mass incidents, and effectively guard against financial risks.

At the same time, the first article of Document No. 99, "Actively and steadily resolve the risks of token issuance and financing activities within the jurisdiction", mentioned that it is necessary to interview and monitor the senior management of the platform within the jurisdiction, monitor the accounts, and freeze the funds and assets when necessary to prevent the platform from running away with the money. Afterwards, Document No. 99 mentioned that "organizations and individuals that have completed token financing should be cleared and properly handled. This content caused panic among some ICO entrepreneurs. Combined with the third article of Document No. 99, regarding the content of the cleanup and rectification of the projects that have been issued, it is required that the local Internet Finance Regulation Offices conduct case-by-case research and judgment on the projects that have been issued, and investigate and deal with illegal and irregular behaviors. Therefore, for entrepreneurs and qualified investors who do have actual blockchain development projects, there should be no need to panic too much. But will these projects clear part of the excessive funds raised from public investors? For example, when public investors realize that there will be no secondary market transactions of tokens from now on, and there are actually greater entrepreneurial risks in project development, what should investors do if they request to return the coins and funds? From the analysis of the content of the document, it seems that it should be within the scope of the clearance, but it depends on the specific handling plan of the local Internet Finance Regulation Offices.

ICO platforms have responded quickly. Two of the top three ICO project information display platforms in China, including ICOINFO and ICOAGE, have announced the suspension of ICO services. Another well-known digital asset trading platform, Bitcoin China (BTCC), also announced on September 2 that it has decided to suspend the recharge and trading business of a digital asset called ICOCOIN (ICO coin) on the platform from now on.

ICO started in 2013 and was originally limited to the development of blockchain technology application projects (see Caixin Weekly 2017 Issue 25 "Blockchain Paradox"). It is a small-scale token financing for technology development. The issued tokens are used to "reward" developers, which is actually equivalent to the early crowdfunding of technology development projects. Successful cases include the digital currency Ethereum. A senior Bitcoin investor pointed out to Caixin reporters that internationally, the main issuers of ICO projects are mostly charitable foundations registered in Switzerland, Singapore and other places. They sell tokens to the outside world, and the buyers are equivalent to "donors" to "fund" the early development of related projects, which is equivalent to charity sales.

However, since 2017, the ICO phenomenon has rapidly heated up. Most of the new projects have nothing to do with blockchain development. Some pyramid schemes have also taken advantage of the situation and simply issued tokens and traded them based on the concept, creating the myth of ICO getting rich overnight and making huge profits without any investment, which quickly gave rise to a bubble. According to the "Report on the Development of Domestic ICO in the First Half of 2017" issued by the National Internet Financial Security Technology Expert Committee, a total of 65 ICO projects have been completed in China in the first half of this year, with a total financing scale of 2.616 billion yuan and a total of 105,000 participants. However, according to Caixin reporters, the transaction volume of ICO in the secondary market has exceeded 100 billion yuan.

This has aroused the vigilance of China's financial regulatory authorities. According to Caixin reporters, on August 18, multiple ministries and commissions had already discussed ICOs; on August 21, the central bank headquarters received a relevant emergency report, which clearly pointed out that from the perspective of penetrating supervision that emphasizes substance over form, many ICO projects should be considered illegal financing. (For details, see Caixin's report on August 25, "ICO's illusion of getting rich overnight is heating up, and the risk of illegal fundraising has aroused regulatory vigilance", and Caixin's report on September 1, "ICO has been identified as suspected of illegal fundraising, and the dream of getting rich overnight has been shattered")

An informed source told Caixin that the regulatory authorities have studied a large number of ICO white papers and concluded that "90% of ICO projects are suspected of illegal fundraising and subjective intentional fraud; the number of ICOs that actually raise funds for blockchain project investment is less than 1%."

A large number of ICOs choose to issue tokens in the hope of circumventing the constraints of the Securities Law and the Regulations on Dealing with Illegal Fund Raising. In theory, whether the tokens issued by ICOs are valuable and will appreciate depends on whether the project is ultimately successful. In actual operations, the project issuers of ICOs in some parts of China do not even have registered companies or standardized procedures, and the content of the project white papers is sloppy or even false. These ICO issuers often issue tokens through Bitcoin exchange platforms and directly enter the secondary market for trading. The actual goal is to attract "leek" investors through the secondary market and drive up the price of tokens to cash out.

"Without exchanges, this market cannot be developed at all. The secondary market is a necessary condition for obtaining high returns." said Zhang Jian, founder and CEO of Bochen. "Now as long as it is announced that it can be listed on an exchange, everyone subconsciously believes that it will definitely rise; the project itself is often ignored." said Huang Liangxin.

The conclusion drawn by the regulatory authorities and legal experts is that the purpose of ICO is to raise funds, but the current public fundraising of more than 200 people, the lack of legal investor thresholds, and illegal continuous bidding transactions have constituted disguised illegal fundraising, illegal securities activities, and illegal financial activities. Many ICO projects have nothing to do with blockchain project development and involve obvious contract fraud.

Since mid-to-late August, relevant industry associations in cities where ICO companies are concentrated, such as Beijing and Shanghai, have issued relevant risk warnings. For example, the Beijing Online Lending Association pointed out that ICO project initiators and institutions may be suspected of illegal business operations. At the same time, relevant PE/VC institutions are suspected of raising funds from the public during the participation process, which violates the law. The China Internet Finance Association also issued a notice, warning that financing activities carried out in the name of ICO without obtaining any license are suspected of fraud, illegal securities, illegal fundraising and other acts.

In response to the booming development of Internet finance in recent years and the chaotic situation that followed, the State Council began to arrange special rectification in April 2016, with 17 ministries and commissions participating, including the People's Bank of China, the Central Propaganda Department, the Central Cyberspace Affairs Commission, the Central Stability Maintenance Office, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of Finance, the Ministry of Housing and Urban-Rural Development, the State Administration for Industry and Commerce, the State Council Legislative Affairs Office, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission, the State Bureau of Letters and Calls, the Supreme People's Court and the Supreme People's Procuratorate. The rectification areas previously included P2P online lending, equity crowdfunding, Internet insurance, third-party payment, asset management through the Internet and cross-border financial business, Internet financial advertising and other fields. According to the statement of Pan Gongsheng, the leader of the special rectification work leading group and the deputy governor of the People's Bank of China, while carrying out the special rectification of the Internet, we must speed up the construction of a long-term mechanism, take the problems found in the rectification as the guide, summarize the experience and lessons in a timely manner, and promote the formation of a long-term mechanism to promote the standardized and orderly development of Internet finance.

Source: Caixin.com