Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

(Updated )

The declaration Monday by China's central bank that initial coin offerings are illegal and should be halted immediately shouldn't come as any surprise.

Beijing had been mulling a plan for controlling this year's boom in cryptocurrencies, with QQ.com reporting last week that authorities met with the chief securities and banking watchdogs. The state-endorsed National Internet Finance Association had also warned that ICOs pose a financial risk and may disrupt social economic order.

Start Me Up
More than $1.8 billion has been raised through the 135 initial coin offerings listed at CoinSchedule this year
Source: CoinSchedule
Note: CoinSchedule lists just a portion of all ICOs, so it offers only a partial picture of the global ICO market.

In developed countries, readers may chortle softly at the notion of disrupting social order; in China, that's a serious allegation.

Chinese policy makers have allowed bitcoin to flourish almost unchecked. To be sure, regulators had shown their concern over the digital currency aiding capital flight and money laundering by curtailing withdrawals earlier this year. Yet their general hands-off approach allowed China to become a global center of trading and mining (the process by which transactions are verified).

Libertarians decry the limited controls China has put on bitcoin, while others have argued that regulation equals legitimacy. Those who think the government has been heavy-handed need to take a look at the country's foreign-exchange and capital controls.

Banning ICOs means regulators are taking a much firmer stance on this fundraising method than they ever had on bitcoin. Offerings were getting so out of hand that it was becoming a cliche. I've written before on why these new tokens are like penny stocks (and that's a good thing), so I won't belabor the point. But whereas bitcoin is just one crytpocurrency propped up by a demand narrative, the majority of new tokens issued this year are of zero value. Let me be clear: It's not that most of these new coins are of low value; most of them have no value whatsoever.

Funding Focus
Over half the ICOs tracked by CoinSchedule this year went toward digital infrastructure projects
Source: CoinSchedule

About 10 percent of all money raised in ethereum-based ICOs has been stolen by cybercriminals, according to a recent estimate by Chainalysis. By August, cybercrime losses had tallied $225 million, the digital currency analysts wrote. And that doesn't take into account all the money flowing into tokens that weren't stolen, but simply funded scams or projects with no future.

The problem is that some ICOs, backed by viable business models, could be worth quite a lot. But given the billions of dollars poured into coin offerings this year, the financing model's growing popularity across business types, and the contagion risk from potential cross-pollination, China's government is right to want to avoid the kind of turmoil that may come with a 90 percent failure rate. 

While losses and broken hearts may accompany a collapse in ICOs, Beijing has shown it's focused on preserving one thing above all else: stability.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates to reflect central bank notice from first paragraph.)

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net