Exclusive | ICO is classified as suspected of illegal fundraising, and the dream of getting rich overnight is shattered

【Caixin.com】(Reporter Wu Hongyuran )

Chinese regulators have taken action against ICOs (initial coin offerings), which have been rapidly heating up and clearly accumulating risks.

A blockchain conference that was supposed to be held on September 2 was called off by the relevant authorities. The reason behind the call was that the regulator had already made a judgment on ICO and relevant regulatory documents would be issued in the near future. Caixin reporters learned about this from an informed source.

On September 2, the "2017 DACA Blockchain International Summit Forum" hosted by the Asian DACA Blockchain Association and the Wuhai Municipal Government of Inner Mongolia was supposed to be held at the Beijing Furama Renaissance Hotel. However, Caixin reporters learned from people close to the organizer that the meeting was suddenly called off on September 1, the day before it was to be held.

Wuhai City in Inner Mongolia has rich coal resources. After the rise of Bitcoin, the area became one of the Bitcoin mining sites. Wuhai City even established a big data industrial park, saying that it will focus on blockchain technology and chip research and development.

Guests attending the conference included relevant personnel from the Wuhai Municipal Government, legal experts, financial institutions such as PricewaterhouseCoopers partner, well-known investor Xue Manzi, and nearly 30 entrepreneurs in the Bitcoin industry.

These entrepreneurs are from Huobi, OKCoin, BTCC, Taiyi Cloud, Elastos, Blockchain, Achain, Baoquan, Jubi, Biduobao, ETChain, Xingyun Sports, NEM... Yes, they are all ICO darlings, and many of them have their own tokens. For example, Achain completed its ICO in just 1 minute and 1 second more than a month ago, raising 21890.47 BTC and 10436.34 ETH.

Riding on the wave of research on digital currency and blockchain, ICO has become extremely popular. According to data, 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.

ICO, a crowdfunding activity through issuing virtual tokens, can be simply understood as 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 - you buy virtual currency, which is equivalent to buying equity without "decision-making power".

"ICO is different from Bitcoin. Bitcoin is an experimental platform for blockchain. Now that ICO is on the rise, Bitcoin has become a victim," said an industry insider.

This alerted Chinese regulatory authorities. After learning from the increasingly rampant illegal fundraising in the past two years, the regulators quickly decided to take action after in-depth research and analysis.

According to Caixin reporters, on August 18, multiple ministries and commissions had already discussed ICO, but their attitude was relatively mild at the time; on August 21, the central bank headquarters received a related emergency report, which clearly pointed out that from the perspective of penetrating supervision that emphasizes substance over form, ICO is a disguised form of illegal fundraising.

An insider told Caixin that people from the central bank 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, and the amount of ICOs that actually raise funds for project investment is less than 1%."

A senior Bitcoin investor pointed out to Caixin reporters that a large number of ICO project initiators or founders of related trading platforms were mostly those who failed in the blockchain project wave in 2015 and "turned around and started ICO."

ICO was once considered to have cleverly circumvented the Securities Law and the Regulations on Dealing with Illegal Fund Raising. The aforementioned insider pointed out that the conclusion of the discussion between the regulatory authorities and several senior legal experts was that ICO was just a legal disguise, and its essence was illegal fundraising in disguise. In addition, even if ICO can get rid of the suspicion of illegal fundraising, it also involves obvious contract fraud.

This means that ICOs will no longer be allowed to be publicly issued, and their activities will shrink and go underground. The existing ICO projects will be absorbed by the trading platforms themselves. At the same time, according to the division of labor of the responsible entities for handling illegal fundraising, the local financial offices (bureaus) will perform regulatory functions.

From August 28 to 31, cities with active ICO companies such as Beijing and Shanghai have issued relevant risk warnings by relevant industry associations. For example, the Beijing Online Lending Association pointed out that ICO project sponsors 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.

Therefore, it is possible that ICO will be banned. Banning ICO will help to accurately strike the "leading sheep", while there will be certain exemptions for the "flock" that blindly follow the trend and bravely become "leeks". "Participants are coerced to a certain extent." said the aforementioned person.

According to Caixin's previous report, the legal basis for this action comes from the State Council's Order No. 247, "Measures for the Prohibition of Illegal Financial Institutions and Illegal Financial Business Activities" promulgated in 1998. The Measures clearly state that illegal financial business activities include: illegal fundraising from unspecified social objects under any name without legal approval; or other illegal financial business activities recognized by the People's Bank of China. (See Caixin.com "ICO Illusion of Getting Rich Quickly Heats Up, Risks of Illegal Fundraising Arouse Regulatory Alerts")

At present, Internet technology is still evolving, and calls for regulatory sandboxes are everywhere. How can we prevent risks and promote development? According to Caixin reporters, from discovering ICO risks to making decisions, the regulatory authorities’ experience is that it is difficult to see the pros and cons of new things at once, but this does not mean that the regulators can do nothing, but rather conduct a "penetrating observation" to see the essence and take measures within the framework of existing laws and regulations.

Furthermore, senior regulators also suggested that the law should also keep up, increase the cost of breaking the law, and change the environment of "bad money driving out good money". For example, the Supreme People's Court should also promptly conduct judicial interpretations of relevant provisions in existing laws and regulations for new things. In addition, the government should also make its position and attitude clear as soon as possible, "It cannot be studied left and right, and the main responsible person should be implemented as soon as possible after penetrating supervision."