Digital currencies received a massive jolt on Monday when China’s authorities issued a notice declaring that initial coin offerings (ICOs) were illegal. Following this announcement, the price of bitcoin declined from $4,584 to nearly $4,350 per bitcoin. By Tuesday morning, the virtual currency was hovering just above the $4000 mark, nearly 20% lower than the record level of $5,000 it had hit over the weekend.
Bitcoin’s fall has prompted some commentators to state that the virtual currency is entering a new phase of price discovery. However, most market watchers are characterizing this three day slide as a short term phenomenon. Bitcoin is likely to emerge stronger after such systemic cleansing, which makes it a good idea to invest in stocks gaining from the virtual currency.
China Bans ICOs
On Sep 4, seven of China’s government agencies, including the People’s Bank of China and the China Securities Regulatory Commission issued a statement which declared that ICOs were illegal. According to this notice, the use of ICOs as a fundraising tool stands effectively suspended, since this could lead to financial irregularities.
Additionally, the document mandates that funds already raised using ICOs should be returned. Further, illegal financial activity emanating from this mechanism would be investigated. Digital fundraising platforms are also likely to be required to have enhanced oversight mechanisms in the future.
Curbs Difficult to Implement
China’s ban on ICOs led to a substantial fall in the value of bitcoin and another popular cryptocurrency, ethereum. ICOs are utilized by start-up companies to raised funds via the sale of cryptographic tokens to prospective investors. In return, the start-up receives more widely accepted digital currencies such as bitcoin or ethereum.
At first glance, restrictions on ICOs should not directly impact the likes of bitcoin. However, this development has had a negative impact on the virtual currency category as a whole. But curbs may be difficult to implement in practice since putting an end to cryptocurrency would mean fighting evolving technologies.
