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Future or fraud?

Rise of cryptocurrency opens wallet of warnings.

The crackdown on cryptocurrency in China is also being felt in Europe. Photo: Reuters

The crackdown on cryptocurrency in China is also being felt in Europe. Photo: Reuters

China’s move to ban initial coin offerings (ICO) has caused chaos among start-ups looking to raise money through the novel fund-raising scheme, prompting halts, about-turns and re-thinks.

China is cracking down on fundraising through launches of token-based digital currencies, targeting ICOs in a market that has ballooned this year in what has been a bonanza for digital currency entrepreneurs.

The boom has fuelled a jump in the value of cryptocurrencies, but raised fears of a potential bubble.

“This is not unlike the dotcom bubble of 2000,” said a partner at a venture capital fund in Shanghai, who didn’t want to be named because of the issue’s sensitivity. “There are a lot of companies raising a lot of money for not very good ideas, and these will eventually be weeded out. But even from the big dotcom bust, you still have gems.”

“One of the reasons regulators stepped in was that the ICO fever extended beyond the traditional crypto community. The timing was an attempt to pre-empt this before it goes into a much broader mass market in China,” the partner said.

Pre-ICO roadshows featuring elaborate standing room-only presentations at five-star hotels drew a diverse crowd, including grandmothers – a likely tipping point for regulators.

The hype and subsequent crackdown came as China focuses on economic and social stability ahead of next month’s congress of the Communist Party, a once-in-five-years event.

Beijing is also waging a broader campaign against fraudulent fundraising and speculative investment, which analysts attribute to China’s underdeveloped financial regulation and lack of legitimate investment options.

While several start-ups said the exuberance had got out of control and they had expected Beijing to act, they said last week’s move panicked investors and caused confusion.

Mi Huijin, for example, said he had just got off a train to Shanghai after closing a deal for his Singpay blockchain start-up when he switched on his phone to a flood of messages about the ban. He summoned the host of a popular live-stream channel to the railway station to calm his followers in a 40-minute broadcast.

“Everyone shouldn’t panic. If you’ve nothing to be guilty of what’s there to be scared of?” he told the roughly 800,000 viewers. “After reviewing the regulations, I feel it’s a good thing.”

Not everyone was convinced. While some comments below his video asked if Singpay would offer refunds, others warned that some users had reported the start-up to police.

China’s position – which differs from regulators elsewhere, who say ICOs may be securities and thus subject to regulation – remains open to interpretation.

Hu Bin, deputy director of the finance institute at the China Academy of Social Sciences, an institution directly under the State Council, or cabinet, has said this is a “stop on ICOs, not a ban. What are we stopping? Illegal ICOs.”

Hu said China recognised there is real demand for ICOs, but wants to prevent them being used for speculation.

“It’s entirely proper for the Chinese government to seek protection for consumers and prevent fraud, (but) confining capital raising to a specific established sector of finance... is to ignore the enormous societal value that blockchain technology can present,” said Alex Bessonov of BitClave, a Silicon Valley-based blockchain company, which, he said, is now discouraging Chinese investors.

This is not unlike the dotcom bubble of 2000

Li Yuan, CEO of Selfsell, a start-up hoping to build a platform for retail investors, said he had to cancel a planned ICO for last week, and return all pledged coins.

For those who already conducted their ICO, things are even more complicated.

Da Hongfei, founder of Neo, a public blockchain which raised $4.65 million through an ICO last year, said it was extending to next month an offer for participants to return their Neo coins in exchange for bitcoin.

While the government announcement appeared to require all funds be returned to investors, Da said he can’t force people to exchange their tokens as they would lose out at bitcoin’s current rate.

“We offer the option, but we can’t point a gun at the user and ask them to refund,” Da said.

That said, nearly all the ICO organisers interviewed by Reuters agreed the ICO market was getting out of control and needed change.

More than 100,000 investors acquired new cryptocurrencies through 65 ICOs in January-June – a frenzy that attracted both investors seeking a quick trading profit and individuals and firms able to raise funds with little more than a plan and a website.

“Many people have not been very discerning on whether the project is actually good or bad,” said Daniel Wang, founder of blockchain start-up Loopring, adding he asked Chinese ICO investors to return their tokens, though it’s difficult to recall tokens already trading on the secondary market.

Indeed, the ban has left around five dozen platforms in China – websites that promote and list the tokens, usually in return for money or a portion of the offering, so they can be traded – in limbo. More than 40, including ICO365 and Bitbays, have shut down or suspended new ICO activity. Some also took their websites offline.

This crackdown is also being felt in Europe. The latest development saw Switzerland’s financial watchdog closing down what it said was the provider of a fake cryptocurrency and is investigating around a dozen other possible fraud cases.

Fraud warning

Bitcoin slid further as investors sold the cryptocurrency after a warning by JPMorgan Chief Executive Jamie Dimon that it “is a fraud” and will eventually “blow up”.

Bitcoin, the original and still the biggest cryptocurrency, has been on a tear in recent months, hitting a record high just below $5,000 at the start of September after a more than fivefold increase in price since the start of the year.

But bitcoin and other cryptocurrencies have been falling in recent weeks, when China banned the issuance of new digital coins for fundraising purposes – a phenomenon known as initial coin offerings, or ICOs.

ICOs have fuelled a rapid ascent in the value of all cryptocurrencies, from about $17 billion at the start of the year – with bitcoin making up around 90 per cent of that – to a record high close to $180 billion at the beginning of September, of which bitcoin represented less than half.

Dimon’s warning triggered a further 11 per cent collapse in the price of bitcoin, which had already lost around 15 per cent of its value in 10 days.

“He joins a long line of market commentators that have been critical of bitcoin and it potentially being in a bubble, so his comments could have been the tipping point,” said James Butterfill, head of research and investment strategy at ETF Securities in London.

Dimon told an investor conference in New York that if any of his traders were found trading bitcoin he would “fire them in a second”, and that bitcoin was “worse than tulips bulbs,” referring to a famous market bubble from the 1600s.

“This is not the first time that Jamie Dimon has spoken against the currency - the last time he had a similar go on the currency was in November 2015,” said ThinkMarkets analyst Naeem Aslam. “Since then, the currency has had a remarkable run.”

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