What is an ICO, and why is China’s central bank banning it?https://cdn3.i-scmp.com/sites/default/files/styles/980x551/public/images/methode/2017/09/05/a0e99fe0-917a-11e7-b116-f4507ff9df92_1280x720_121249.JPG?itok=38YUDkXK
An initial coin offering (ICO) is a form ofcrowd-sourced fundraising that uses cryptocurrencies. Also known as digitalcurrencies, or virtual currencies, cryptocurrencies work as a medium ofexchange using encryption to secure transactions and for creating (known asmining) additional units.
Cryptocurrencies, the best known of whichis the bitcoin, use distributed ledgers known as block chains to tracktransactions. There are now hundreds in existence, as the currencies’independence make them attractive to some users.
Cryptocurrencies can be designed to bewidely used, as with bitcoin, or to operate within an online network like theEthereum network that uses ethers to make payments.
When a new cryptocurrency is launched, thecreators, as with any other project, need funds to make it work. ICOs haveevolved to fill this need.
How does an ICO work?In initial public offerings (IPOs),companies sell their equity, in the form of shares, for cash. Rules that governIPOs usually require the companies selling equity to be backed by tangibleassets.
During ICOs, companies exchange their newlycreated cryptocurrencies -- called tokens -- for payment in an existingcurrency, which can be old-fashioned cash, or an established cryptocurrency,often bitcoin.
ICO investors profit when their tokens gainin value at a faster rate than the currency they used to pay for them. Thevalue, or “capital gains” of these appreciating tokens can only be realised ifthey are exchangeable for legal tender, or for goods or services.
These fundraising ICOs are conductedonline, and are usually announced on a cryptocurrency forum. Most projects havea white paper, a website, and active online forums as a way of buildingconfidence. An ICO has an additional benefit for thefounders of the cryptocurrency, as it provides a way of distributing the newtokens.
Arethey successful?Karmacoin held the first ICO in the annalsof cryptocurrencies, with its April 2014 sale of karmashares.
Ethereum sold US$18 million of ether unitsin July-August of 2014, valuing each ether at less than US$1. As of June thisyear, each ether unit was valued at US$378.
This is not always the case. Historically,ICOs have been unregulated and so offered an opportunity for the unscrupulousto exploit others hoping make some quick cash.
As many as 65 ICO transactions werecompleted in China in the first seven months of 2017, raising a combined 2.6billion yuan (US$398 million), according to the Beijing Internet FinanceAssociation.
According to the People’s Bank of China,China’s central bank, 90 per cent of the ICOs that have been launched on themainland were fraudulent.
Howare they regulated?Regulators are now starting to look intoICOs.
In July, the US Securities & ExchangesCommission reported on its investigation of the DAO, a virtual organisation,and its use of distributed ledger or block chain technology to facilitate theoffer and sale of DAO Tokens to raise capital.
The SEC determined that DAO Tokens weresecurities, and said that those who offer and sell securities in the US wererequired to comply with federal securities laws, regardless of whether thosesecurities were bought with virtual currencies or distributed with block chaintechnology.
Arecryptocurrencies legal tender?
The People’s Bank of China has banned ICOsoutright, calling them illegal and fraudulent.
The legality of cryptocurrency is bestdescribed as “evolving” or “undefined” in most countries. Hundreds ofcryptocurrency mines exist, although their creations are best described as“barter” if a willing buyer wants to exchange a product or service for them,rather than commonly accepted legal tender.
Bitcoins and other cryptocurrencies havebeen legally accepted as money in Japan since 2014, owing to a government decisionthat acknowledged that there are no existing laws that can unconditionally banindividuals or companies from receiving cryptocurrencies as payment.
The People’s Bank of China doesn’t make itillegal for private parties to hold cryptocurrencies, but bans financialinstitutions from holding or transacting in them.
In Hong Kong, cryptocurrencies areconsidered virtual commodities. There are no laws that directly regulate theuse of cryptocurrencies in the city, although the Organised and Serious Crimes Ordinanceand other legislation provide legal sanctions against unlawful acts such asfraud or money laundering through the use of cryptocurrencies.
In Taiwan, bitcoins can be purchasedthrough convenient stores, some of which accept them in exchange for products.
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