The Chinese government has banned initial coin offerings, a new fundraising phenomenon that has taken the Internet by storm. In a Monday ruling, the People's Bank of China ruled that these unregulated sales violated Chinese law and must stop immediately.

Over the last year, ICOs have become a big business. Investors in these sales buy new blockchain-based assets—similar to Bitcoins but designed for specialized purposes. For example, an offering last month called Filecoin will enable people to buy and sell online storage capacity in a decentralized marketplace secured by a blockchain. Another sale earlier this year offered the Basic Attention Token, intended to be used to sell ads through the privacy-focused Brave Web browser.

There have been dozens of ICOs this year alone, with many raising tens of millions of dollars. Ordinarily, fundraising on this scale would be strictly regulated by the Securities and Exchange Commission in the United States and their counterparts in Europe, China, and around the world. Securities laws typically require extensive disclosure and other safeguards before an investment can be offered to the general public. Chinese regulators are now cracking down on projects that flout Chinese laws in this area.

These laws were passed to prevent scammers from defrauding gullible investors. And that's exactly what has started to happen with ICOs. Some ICOs are legitimate, offering technology that could have a bright future. Others are little more than pyramid schemes. And with so many new coins being issued, many of the ones that aren't outright scams are still likely to fail.

The US Securities and Exchange Commission weighed in on this topic in July, ruling that a blockchain-based organization called the DAO had run afoul of US securities laws. The DAO was explicitly promoted as a new kind of company, putting it squarely within the reach of securities laws. But the SEC didn't rule on the broader phenomenon of ICOs, leaving some uncertainty about when selling cryptocurrencies to the general public ran afoul of securities laws.

The ruling has likely put downward pressure on the value of the leading cryptocurrencies, bitcoins, and Ethereum's ether. Users who participate in ICOs are typically required to acquire Bitcoin or Ethereum to exchange for new cryptocurrencies, and so the ICO boom has helped to push up the value of both bitcoins and ether. Late last week, the value of one bitcoin almost reached $5,000 before declining to around $4,300 on Tuesday morning. Still, the virtual currency is way up from the start of the year, when one Bitcoin went for around $1,000.

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