Initial coin offerings draw fraud warning from China trade group

Cryptocurrency bitcoin illustration picture taken at La Maison du Bitcoin, Paris, May 27, 2015. — Reuters pic
Cryptocurrency bitcoin illustration picture taken at La Maison du Bitcoin, Paris, May 27, 2015. — Reuters pic

HONG KONG, Aug 31 — The rise of initial coin offerings in China has disrupted the social economic order and poses a financial risk, a domestic trade group said.

Institutions have misled investors to raise funds through ICOs, the National Internet Finance Association of China, an organisation endorsed by the State Council and top finance and banking watchdogs, said in a statement yesterday. Unauthorised by regulators, some of the ICOs are suspected of fraud, illegal equity offerings and fundraising, the group said in a statement.

“ICO projects have unclear assets, no investor suitability standards and gravely lack information disclosure and therefore have relatively high risks,” the association said. “Investors should keep a clear mind, stay on high alert for frauds and report any wrongdoings to the police department.”

ICOs, which have raised about US$1.6 billion (RM6.83 billion), have been deemed a threat to China’s financial market stability as authorities struggle to tame financing channels beyond the traditional banking system. They have also increasingly captured the attention of central banks that see the fledgling trend as a threat to their authority.

Virtual tokens

A cross between crowdfunding and an initial public offering, ICOs involve the sale of virtual coins mostly based on the ethereum blockchain, similar to the technology that underpins bitcoin. Unlike a traditional IPO in which buyers receive shares, getting behind a startup’s ICO nets you virtual tokens — like mini-cryptocurrencies — unique to the issuing company or its network. That means they grow in value only if the business or network proves viable, attracting more people and boosting liquidity.

The amount of money amassed within a short span of time has also attracted cyber criminals, with an estimated 10 per cent of money intended for ICOs looted by scams such as phishing this year, according to Chainalysis, a New York-based firm that analyses transactions and provides anti-money laundering software.

China’s regulators are considering measures to regulate ICOs, such as controlling the size of the offerings or requiring more disclosure, local media reported this week, citing unidentified people. — Bloomberg