Bitcoin has hit a slump after the People’s Bank of China (PBOC) ordered a ban on fundraising activities that use initial coin offerings (ICOs).
Currently, there is a trend among startups to raise investment by selling new cryptocurrencies based on the Distributed server processing system ethereum blockchain. This practice is likened to an initial public offering, but the difference is that ICO backers get virtual tokens, which may grow in value if the business flourishes.
ICOs have become a popular activity around the around, and particularly in China. Until recently, that is.
On Monday, the Chinese central bank instructed companies that have already raised money via ICOs to refund its investors, adding that it will punish similar fundraising activities in the future while penalizing legal violations in the ones that have already been completed.
PBOC, which deemed ICOs as illegal, said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies, noting that the tokens are also barred from being used as currency on the market. Banks are also forbidden from offering services to ICOs, according to the central bank.
The ban on ICOs may not directly affect bitcoin, but the news has resulted in bitcoin’s price dropping to $4,200 level on Tuesday—the most since July. Charles Hayter, founder and CEO of digital currency comparison website CryptoCompare, told CNBC that PBOC’s ban “created negative market sentiment which is weighing on the prices of several virtual currencies.”
Chinese ICO platform ICOINFO was among the first to stop all ICO services. On its website, the company said it is working with groups that issued virtual tokens on its platform to return funds to investors. So far, several projects have already returned funds to investors’ accounts, according to ICOINFO.
Meanwhile, Chinese exchange Binance said on its website that it is “working around the clock on a solution that will fully satisfy the new regulations in China.”
This isn’t the first time that Chinese regulators have targeted the local cryptocurrency space. In February, major digital currency exchanges in China stopped Bitcoin and litecoin withdrawals on their respective platforms as they improve their anti-money laundering capabilities to prevent “illegal transactions.” The upgrades were part of the requirements set by the People’s Bank of China, who called on digital currency operators to step up their game against anti-money laundering.