China ‘s ongoing ban on initial coin offering (ICO) may be lifted once the ruling elites' meeting is over next week, as authorities make sure that high-profile fraud cases will not hit the headlines around the Party Congress time.

Industry observers that AsianInvestor spoke to generally believe that the ICO clampdown will not last, despite the heavily-worded statement jointly issued by the Chinese central bank and six other regulators early last month banning ICOs. China's response to ICOs, which are a form of digital tokens issued by companies, is uniquely draconian.

According to the statement, speculation in fast-growing ICOs is proliferating and involves illegal financial activities which "seriously violate economic and financial order." It said ICOs should cease immediately and money already raised through ICOs must be refunded to investors.

But industry observers are hopeful that after the Party Congress, a new legal framework and possibly a licensing system will emerge to regulate the increasingly popular fundraising channel as well as other areas in the fintech space such as the crypto currency bitcoin.

“You see [a crackdown] not just in the financial industry but in many [other] areas [too]. There’s been the crackdown on VPNs over the past couple of months, there’s been a lot more attention to social media, security has been increased in the big cities. It’s just part of the run-up to the Party Congress,” Zennon Kapron, founder of Kapronasia, a Shanghai-based fintech research firm, told AsianInvestor.

People can still find ways to do ICOs or trade bitcoins outside the country and a total ban will not work. The reason they are banning ICOs right now is because the Party Congress will start soon and they are looking to assure stability, John Patrick Mullin, Guotai Junan Securities' senior research analyst on China fintech, told AsianInvestor.

The US securities regulator has pressed charges against companies defrauding investors in ICOs. “That will be [the type of] very big story that they don’t want to have around the Party Congress,” Mullin said.

Two companies in the US were alleged to have defrauded investors in ICOs. They were suspected of selling unregistered securities after investors had been told they could expect sizeable returns from the companies' operations when in fact neither actually had any real operations, according to a Securities and Exchange Commission (SEC) statement released on September 29.

Regulators may come out with a licensing system for ICOs and bitcoin, Kapron said.

“When you look at [lead cryptocurrency] bitcoin itself and ICOs, the worries of the regulators were around money laundering, offshore money flows, and risks to mediocre individual investors. So with licensing, presumably there will be more scrutiny on the actual transactions,” Kapron said.

Some are scams

There is no doubt that some of these ICOs are scams, as it's a market that lacks agreed-upon standards, regulation or any specific oversight, according to a commentary released by S&P Global in July.

While companies have to register with the regulatory authority and issue a legal document—the prospectus, when they look to do an IPO, companies doing ICOs and seeking to raise funds simply have to release a document in the form of a white paper that outlines key information.

Some ICO issuers are trying to self-regulate around know-your-customer and anti-money laundering. But the number of companies taking the initiative for these due diligence practices is still small, Bharath Vellore, APAC product innovation manager of Accuity, a US-headquartered financial crime compliance solutions provider, told AsianInvestor.

“I am very honest, it’s just a very small percentage [of companies] doing that,” he added.

Investor caution is also advised by some ICO issuers, including Ephi Zlotnitsky, CEO of LucidExchange, which is planning to do an ICO in the US.

“Unfortunately there are bad apples in any environment…I personally believe that the ban on ICOs [in China] will be lifted when some of the ground rules are established by the regulators. ICOs are not a passing trend,” he told AsianInvestor in an email.

Debate on tokens

ICOs are based on the distributed ledger technology of blockchain initially used for bitcoin. They are a form of crowdfunding with the fund raising taking place on blockchain and digital tokens are issued, according to the S&P commentary.

ICOs have grown exponentially and raised $1.25 billion this year, outpacing global Angel & Seed stage Internet VC funding in recent months, according to a Goldman Sachs report released in August, citing numbers from Coin Schedule.

On the day after China issued its ICO ban, the Hong Kong securities regulator said on September 5 that digital tokens that are offered or sold may be legally considered “securities” and thus subject to the securities laws of Hong Kong.

If the issuer structures its ICO in a way that the tokens give investors shares in the company, or if fixed payouts are given to token holders over a certain period of time, tokens are like securities, Musheer Ahmed, general manager of the FinTech Association of Hong Kong, told AsianInvestor.

But some disagree. “The SFC has come out with a statement that they are looking to regulate ICOs as securities without even realising that they are actually derivatives and juxtaposed to securities,” Philip York, Hong Kong-based principal at systematic trading firm Alt224, told AsianInvestor in an email.

The S&P commentary also judges that ICO investors are buying neither company shares nor its debts.

They only own a full or partial share of the token that is for sale, and the company that has sold the token owes nothing to its buyers other than the use of platform services equal to its value, it said.