When China’s central bank banned initial coin offerings (ICOs) at the start of this month, the move helped trigger a crash in the value of bitcoin. The cryptocurrency has largely recovered, but enthusiasts will be on the alert again, as South Korea has now followed China’s lead.
The ICO is a new form of fundraising where, instead of a startup issuing its investors with shares, it gives them digital tokens that are sometimes connected with the new service they’re trying to sell. There are huge risks here, as many of the startups launching ICOs are getting regular people to buy into thin or implausible business plans—or, worse, outright scamming them with pump-and-dump schemes.
Those risks are what led China to pull the plug, and the same thought seems to have occurred to South Korea’s financial regulators. The country’s Financial Services Commission (FSC) said Friday that it was banning all ICOs in the country, with a threat of “stern penalties” for those who continue with the fundraising method.
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“There is a situation where money has been flooded into an unproductive and speculative direction,” FSC vice chairman Kim Yong-beom said, according to Yonhap.
The regulator added that virtual-currency trading needed to be closely monitored and controlled. It’s worth noting that China followed up its ICO ban with a heavily rumored—though never officially confirmed—crackdown on Bitcoin exchanges.
The latest news triggered a 2% fall in Bitcoin’s value, and a slightly larger drop in the value of Ethereum, the virtual currency that’s used in many ICOs. It remains to be seen how much the Korean ban will affect sentiment in the coming days.
The cryptocurrency community is certainly aware of the risks surrounding ICOs. Ethereum creator Vitalik Buterin earlier this week released a whitepaper he had co-authored regarding ways to dampen the dangerous hype that sometimes accompanies the offerings.