China's move last week to ban initial coin offerings (ICO) has caused chaos among start-ups looking to raise money through the novel fund-raising scheme, prompting halts, about-turns and re-thinks.
China is cracking down on fundraising through launches of token-based digital currencies, targeting ICOs in a market that has ballooned this year in what has been a bonanza for digital currency entrepreneurs.
The boom has fuelled a jump in the value of cryptocurrencies, but raised fears of a potential bubble. "This is not unlike the dotcom bubble of 2000," said a partner at a venture capital fund in Shanghai, who didn't want to be named because of the issue's sensitivity.
"There are a lot of companies raising a lot of money for not very good ideas, and these will eventually be weeded out. But even from the big dotcom bust, you still have gems."
"One of the reasons regulators stepped in was that the ICO fever extended beyond the traditional crypto community. The timing was an attempt to pre-empt this before it goes into a much broader mass market in China," the partner said.
Investors in China contributed up to 2.6 billion yuan ($394 million) worth of cryptocurrencies through ICOs in January-June, according to a state-run media report citing National Committee of Experts on Internet Financial Security Technology data.
Pre-ICO roadshows featuring elaborate standing room-only presentations at 5-star hotels drew a diverse crowd, including grandmothers - a likely tipping point for regulators. The hype and subsequent crackdown came as China focuses on economic and social stability ahead of next month's congress of the Communist Party, a once-in-five-years event.
Beijing is also waging a broader campaign against fraudulent fundraising and speculative investment, which analysts attribute to China's underdeveloped financial regulation and lack of legitimate investment options.
While several start-ups said the exuberance had got out of control and they had expected Beijing to act, they said last week's move panicked investors and caused confusion.
Mi Huijin, for example, said he had just got off a train to Shanghai after closing a deal for his Singpay blockchain start-up when he switched on his phone to a flood of messages about the ban. He summoned the host of a popular live-stream channel to the railway station to calm his followers in a 40-minute broadcast.
"Everyone shouldn't panic. If you've nothing to be guilty of what's there to be scared of?" he told the roughly 800,000 viewers. "After reviewing the regulations, I feel it's a good thing."
Not everyone was convinced. While some comments below his video asked if Singpay would offer refunds, others warned that some users had reported the start-up to police.
China's position - which differs from regulators elsewhere, who say ICOs may be securities and thus subject to regulation - remains open to interpretation.
Hu Bin, deputy director of the finance institute at the China Academy of Social Sciences, an institution directly under the State Council, or cabinet, has said this is a "stop on ICOs, not a ban. What are we stopping? Illegal ICOs."
Hu said China recognised there is real demand for ICOs, but wants to prevent them being used for speculation. "It's entirely proper for the Chinese government to seek protection for consumers and prevent fraud, (but) confining capital raising to a specific established sector of finance ... is to ignore the enormous societal value that blockchain technology can present," said Alex Bessonov of BitClave, a Silicon Valley-based blockchain company, which, he said, is now discouraging Chinese investors.
Li Yuan, CEO of Selfsell, a start-up hoping to build a platform for retail investors, said he had to cancel a planned ICO for last week, and return all pledged coins. For those who already conducted their ICO, things are even more complicated.
Da Hongfei, founder of Neo, a public blockchain which raised 30 million yuan ($4.65 million) through an ICO last year, said it was extending to next month an offer for participants to return their Neo coins in exchange for bitcoin.
While the government announcement appeared to require all funds be returned to investors, Da said he can't force people to exchange their tokens as they would lose out at bitcoin's current rate.
Bitcoin traded around $4,350 on Tuesday, according to Bitstamp, down from nearly $5,000 earlier this month.
"We offer the option, but we can't point a gun at the user and ask them to refund," Da said. That said, nearly all the ICO organisers interviewed by Reuters agreed the ICO market was getting out of control and needed change.
More than 100,000 investors acquired new cryptocurrencies through 65 ICOs in January-June - a frenzy that attracted both investors seeking a quick trading profit and individuals and firms able to raise funds with little more than a plan and a website.
"Many people have not been very discerning on whether the project is actually good or bad," said Daniel Wang, founder of blockchain start-up Loopring, adding he asked Chinese ICO investors to return their tokens, though it's difficult to recall tokens already trading on the secondary market.
Indeed, the ban has left around five dozen platforms in China - websites that promote and list the tokens, usually in return for money or a portion of the offering, so they can be traded - in limbo.
More than 40, including ICO365 and Bitbays, have shut down or suspended new ICO activity. Some also took their websites offline. Binance, which said that over 80 per cent of its users were based overseas, said it would restrict all Chinese IP addresses from trading.
For those companies serious about raising funds, there are other options. Xiaoning Li, CEO of VCCoin, said he returned 2,000 bitcoins to investors and was figuring out what to do next.
"We have angel investors. We will probably still do an ICO, but have to look at where and how to do it," he said.
The co-founder of another platform said they were re-thinking their strategy outside China, and "will shift our focus to markets which are not banning ICOs, but rather trying to put in place higher standards and regulatory supervision" - such as the United States, Canada and Singapore. - Reuters