China halted its initial coin offering (ICO) but didn't terminate it, and the next step should be introducing regulations and establishing a test system for financial innovations, experts said.
Together with other six state departments, China's central bank the People's Bank of China declared last Monday that ICO is illegal public financing, and all related fundraising activities should be stopped immediately.
ICO grew in China without a regulation system or transaction rules, said Hu Bin, Deputy Director of the Chinese Academy of Social Sciences' Institute of Finance and Banking, in a CCTV interview on September 7, noting ICO has turned into a speculation tool.
ICO thrived in Chinese market with a total funding of 2.6 billion yuan and 105,000 investors in the first half of this year, official data showed.
ICO is like an initial public offering (IPO), but with a cryptocurrency. Startups use this unregulated methods to raise funds, and are able to bypass the traditional regulated capital-raising process.
However, investments left investors unprotected as they were neither regulated or supervised.
In fact, ICO takes advantages of loopholes of laws on IPO, said Xue Hongyan, director at Suning Finance Research Institute, according to Xinhua.
The ICO claimed itself as IPO in the blockchain industry but, unlike the traditional stock market of IPO trading for shares in companies, ICO trading for virtual currency is more like group funding, he said.
A virtual currency platform named Litecoin China disappeared during its ICO, CCTV reported one day after the central bank's announcement.
The website registered in January has been unavailable and the company's registered address turned out belonging to another company.
If an ICO development team runs away or fails to meet its promises, the investors will suffer the loss therefrom and find themselves without any protection, said Shuai Chu, an virtual currency financing project head.
The ICO may help some tech startups get investment but many ICOs are utilized for illegal fundraising and fraud, as well as pyramid selling, Hu said.
To get a balance between financial innovation and risk control, Hu expected China to introduce a Sandbox Mechanism: An original computer term indicating a security mechanism for separating running programs, to build a safe space for innovation in finance industry.
