ICO vs STO: Are Security Token Offerings (STOs) Banned in China?

The mention of China, for cryptocurrency enthusiasts, will bring more than a tinge of danger. The country was formerly the hub of crypto activities and all of a sudden it was not, no thanks to an outright ban on crypto operations in the country including Initial Coin Offerings (ICOs) right at the height of its successes.

Now, a new form of crowdfunding is taking the place of the receding ICO system. Unlike ICOs which issue utility tokens, Security Token Offerings (STOs) issue security tokens which are backed by a tangible asset, often a stake in the issuing company. STOs are treated pretty much the same way as securities; they have to comply with securities laws and be approved by securities regulators.

This simple guide will help you know if you’re dealing with an ICO or an STO.

In the United States, for instance, the SEC appears to be warming up to STOs as against its continued crackdown on ICOs. But will the Chinese state which seems an avowed enemy of anything crypto allows this new crypto investment vehicle?

According to local news reports, China’s central bank, The People’s Bank of China (PBoC), have hinted at the illegality of STOs in the country. English-language local news outlet South China Morning Post reported that a top exec from the bank classified STOs alongside ICOs as “illegal’ financing activities” during a summit in China’s capital Beijing.

Pan Gongsheng, a deputy governor at PBOC, was quoted as saying:

“…’illegal’ financing activities through STOs and ICOs [Initial Coin Offerings] were still rampant in the mainland despite a nationwide clean-up of the cryptocurrency market last year.”

He clarified:

“the STO business that has surfaced recently is still essentially an illegal financial activity in China.”

While alluding to the country’s ban on crypto activities, Gongsheng insisted that the policy was timely as it prevented financial instability which would have resulted from burgeoning “chaotic” crypto market.

“Most of the financing operations conducted through ICOs in China were suspected of being illegal fundraising, pyramid sales schemes, and other financial fraud.” He explained adding that “virtual money has become an accomplice to all kinds of illegal and criminal activities.”

Gongsheng echoed a similar warning issued the previous week by Huo Xuewen, the country’s chief of Bureau of Financial Work. “I want to warn those who are promoting STO fundraising in Beijing. Don’t do it in Beijing. You will be kicked out if you do it,” Xuewen had reportedly said.

As Smartereum reported, the United States securities regulator said it was preparing a comprehensive guide that will distinguish utility tokens offered by ICOs and security tokens which should be duly registered with the agency. Director of the commission, William Hinman while speaking in Washington last month said the “plain English instrument” help token issuers determine what steps to take after they determine the type of tokens they are issuing.

In this light, the commission has gone all out against issuers of security tokens without due registrations. Smartereum reported the agency charged crypto token trading platform EtherDelta for selling security tokens illegally. According to SECs statement, the operator agreed to pay $300,000 in disgorgement and $13,000 in pre-judgment interest as well as a penalty of $75,000. Recently, the commission issued a cease-and-desist order to crypto investment firm CoinAlpha Advisors LLC for a similar offense. The charge came with a fine of $50,000.

Solomon Sunny is the market reporter for Smartereum, one of the global leaders in Ethereum, blockchain and currency news. He produces technical price updates on digital currencies and writes recent developments about blockchain.

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