Initial coin offerings regulated in China

The Chinese central bank (People’s Bank of China), together with six ministries, issued a notice (Notice) on Monday afternoon confirming that initial coin offerings (ICOs) are considered a type of unauthorised public financing activity, and therefore requiring these activities (within mainland China) to stop immediately. 

The Notice re-affirmed the official position that virtual currency is not legitimate in mainland China, and shall not be traded.  The Notice states that ICOs are deemed as highly risky to the financial stability of the society, and may involve various crimes (such as illegal offering of securities, illegal fund raising and financial fraud).  Effective immediately, all ICOs (launched within mainland China) shall stop.  For completed ICOs (launched within mainland China), exit arrangements shall be made for the investors which shall reasonably protect the investors’ interest (However in reality it will be challenging to work out a legitimate way for the investors to exit under current Chinese law.  We anticipate further official guidance on this front).   All financial institutions and third party payment institutions shall not provide services in connection with ICOs or virtual currency.

ICOs have become extremely popular among investors and businesses recently in China (although many Chinese businesses launching ICOs end up choosing an offshore structure instead of onshore for regulatory concerns).  The Notice delivers a clear message from the Chinese government that ICOs in the mainland shall not be un-regulated going forward.  It remains to be seen whether and to what extent the Chinese government will take action towards those offshore ICOs which substantially involve Chinese players (such as the Chinese investors or ultimate Chinese controllers of the relevant fund raising businesses, along with its existing control policies of exchanging RMB into foreign currency and vice versa). 

It is notable that the Notice doesn’t blindly ban the activities of ICOs as illegal, instead it describes ICOs as a type of unauthorised public financing activity.  We understand that the Notice is to certain extent anticipated by the market (sooner or later), in particular given the reality that the popularity of ICOs has gone beyond the initial Blockchain startups and professional investors and in addition no current Chinese law can be squarely applied to ICOs.  The Chinese government has been clear on its continuous encouragement to the blockchain business.  I believe that further official guidance on ICOs should be coming as the next step, and the Notice, should not, as many feared, be the end of the story.