China has been casting its shadow on the price of cryptocurrencies in the past week. The price of Bitcoin dropped sharply after news about a crackdown on virtual currency exchanges emerged on Friday. The move came on the heels of an announcement by the People’s Bank of China (PBOC) on Initial Coin Offerings (ICOs) and that of National Internet Finance Association of China.

The news report by Caixin read, “Chinese regulators ordered a halt to all virtual currency trading platforms in the country, acting to further rein in risks related to cryptocurrencies, Caixin learned from a source close to regulators. The central government’s office overseeing internet financial risks has ordered local authorities to shut down virtual exchanges trading digital currencies with the yuan, a source close to the office told Caixin. The order will affect major Bitcoin platforms such as OKCoin, Huobi and BTC China.”

The news was initially taken as a disallowance of trading between virtual currencies and legal tender in China…. however, it was further revealed that the intent is to target unauthorized trading at any of the virtual currencies.

On August 30, 2017, the National Internet Finance Association of China—issued a notice on “guarding against risks of financing activities in the name of ICO.” The notice was issued in public interest to caution investors against certain matters related to ICOs in the wake of the “rapid rise of projects which raise funds in the name of ICO (Initial Coin Offerings), upsetting social and economic order and creating relatively large potential risks.” It cautioned investors against misleading advertisements and how an increasingly larger number of domestic and foreign institutions are engaging “in financing activities under the cover of ICO without any form of licensing.” It warned investors of the risks and suggested that, “Investors should evaluate and discern such projects with discretion and bear related risks on their own terms.”

The National Internet Finance Association of China (NIFA) is a national self-regulatory organization in the field of internet finance and is initiated by the People’s Bank of China in collaboration with relevant ministries and commissions.

On September 8, 2017, the People’s Bank of China issued a public notice of the PBC, CAC, MIIT, SAIC, CBRC, CSRC and CIRC on Preventing Risks of Fundraising through Coin Offering. It made certain announcements:

• The essential attributes of fundraising through coin offering
• No organizations or individuals shall engage in illegal fundraising through coin offering
• Management of related platforms shall be strengthened
• Financial institutions and non-bank payment institutions shall not conduct businesses related to coin offering fundraising and trading
• The public need to stay aware of the risks of coin offering fundraising and trading
• Self-regulatory organizations shall exercise industry self-regulation

According to a report by the National Committee of Experts on the Internet Financial Security Technology, there were 43 ICO platforms in China as of July 18. It further revealed that 65 ICO projects had been completed with a total of 2.166 billion yuan being raised in Bitcoin (BTC) and Ether (ETH).

The regulatory tightening around ICOs may have a positive impact of ‘flushing out’ scammers from the market; however, it will make other destinations with clearer and most open regulations more attractive for ICO investors. Vishal Gupta, Co-founder, Blockstreet told Investopedia, “As we see knee jerk reactions to any announcement the People's Bank of China makes, many Chinese ICOs are starting to look beyond China and their vague regulations. I would not be surprised if many leave for more transparent regulatory environments like Denmark. One option available to them is to launch on a decentralized exchange like OpenLedger. It has a thriving ecosystem that is getting bigger by the day”

China has been strict in terms of regulations around cryptocurrencies. In February 2017, major Bitcoin exchanges in China had halted crypto withdrawals after pressure from regulators. The Chinese Bitcoin exchanges resumed normal operations, allowing withdrawals after nearly a four-month freeze. Back in 2013, the government banned financial institutions from trading in bitcoin. (Related reading, see: Are There SEC Guidelines on ICOs?)

The effect of the recent announcements was evident on the price of Bitcoin and other virtual currencies. Bitcoin was trading around $4500 levels around September 3 which fell by more than $300 on the next day to $4200. The price recovered during the week but again took a hit to fall from $4600 (September 7) levels to $4100 levels (September 10). The price of Bitcoin at the time of press was $4152 with the overall cryptocurrency market capitalization $144.57 billion. (data based on coinmarketcap.com at 5:50AM, September 11, 2017).