South Korea clamped down on initial coin offerings (ICO) Friday, banning the cryptocurrency crowdfunding practice, often used as a source of capital for startups, as the east Asian nation joins a global backlash against the popular fundraising platform.
The decision, announced in Seoul today, Friday, after a meeting of the cryptocurrency task force, hit the price of bitcoin, which fell by around 2 percent. Ethereum — whose protocol many ICOs rely on — fell by 5 percent.
Kim Yong-bum, vice chairman of South Korea’s Financial Services Commission, said during the meeting:
“all forms of initial coin offerings regardless of using a certain technology or a certain name…We are worried about adverse effects such as increased risk of fraud, [so] the ICO will be prohibited in all forms,” .
Earlier this month, China declared ICOs illegal and demanded a halt to fundraising involving virtual coins. ICOs are “essentially a form of unapproved illegal public financing behaviour,” a group of seven agencies led by the central bank said at the time.
Separately on Friday, Switzerland’s financial supervisor Finma announced it was investigating “a number” of cases of initial coin offerings for possible breaches of regulations, including on preventing money laundering and the financing of terrorism. Finma said it was “technology neutral” and such offerings were not covered by specific rules, but it warned they could fall within existing regulations. Finma said it had “observed a marked increase” in initial coin offerings.
The UK’s financial regulator also cautioned that it was paying more attention to ICOs, as Australia’s securities watchdog warned consumers to understand the risks relating to ICOs and be wary of scams.
The U.S. Securities and Exchange Commission (SEC) has promised greater scrutiny of the practice, but stopped short of implementing a ban.
ICOs have become a popular as a way for businesses to raise millions of dollars in a short space of time, but critics say they leave investors open to fraud.
“It would shock me if you don’t see pump-and-dump schemes in the initial coin offering space,” SEC Chairman Jay Clayton said Thursday.
Beijing has sought to exert control over the booming cryptocurrency market in China, fuelled by a massive interest in Bitcoin. Despite the ban, the decentralized nature of the currency has ensured the market in China remains vibrant.
While much of the world clamps down on ICOs, Russia is embracing their potential. An ICO backed by an aide to President Vladimir Putin raised $37 million to build a mining operation.
Bitcoin (and the blockchain technology underpinning it) work without control from a central bank, making it a headache for regulators. Users can also remain largely anonymous, making it difficult for governments to track trades.
An ICO allows start-ups to raise funds by selling digital tokens, or coins, to investors, bypassing the venture capital industry that is a typical source of funding for new companies. The tokens enable investors in the ICO to use the digital services that the start-up plans to produce or sell them if they appreciate in value.
The growing popularity of ICOs is thought to be behind a surge in the value of digital currencies this year. But financial regulators around the world have in recent weeks warned about the dangers, pointing to the risks of an asset bubble, market manipulation and fraud. More than $1.8bn has been raised through ICOs this year.
Photo: Bitcoin cryptocurrency trading exchange
South Koreans were quick to adapt to digital currencies and the country is the world’s third-largest market for bitcoin, which has seen its price soar this year amid strong demand in the Asia region. Proponents of ICOs say it is a faster, cheaper alternative to initial public offerings or venture capital.