China and South Korea clamp down on ICOs

China’s banking and securities regulator has implemented a complete ban on cryptocurrency raises – initial coin offerings – deeming them “non-approved, illegal financial behavior.”

The People’s Bank of China expressed concern in a statement that the tokens or coins, the most well-known being Bitcoin, were not regulated by the bank or by Chinese securities law.

“The ‘virtual currencies’ are not issued by the monetary authorities, do not have legal status equivalent to money, and cannot and should not be circulated as a currency in the market,” the bank noted.

As of September 4, all cryptocurrency issues and financing activities must end, and investors who have completed transactions should “make arrangements for repatriation of their funds,” although the regulator did not specify up to what particular date transactions would have to be refunded.

The ban, which sent cryptocurrency values down as much as 35 percent, throws into doubt the currency’s future as a viable investment for private equity. There had been growing interest from alternative investment firms, with law firms Clifford Chance, Allen & Overy, Fieldfisher and Morrison Foerster, issuing explainers on the regulation of the market in recent weeks.

In August, a Dutch fund, the Finles Lowestoft Equities Fund, announced it was raising $100 million of a $500 million target via an ICO using FundCoin.

There had also been optimism expressed about cryptocurrency’s future in private equity.

“Due to the fluidity and changing nature of the sector, managers will need to have a wide enough investment strategy allowing for some investment in or exposure to cryptocurrency without being tied in the documents to a very specific form of words,” Rob Mailer a partner at Morrison Foerster, told pfm.

In South Korea, the Financial Services Commission will establish a task force to monitor cryptocurrency trading within its borders, indicating in a statement that there are signs the market is “overheating.”

The FSC is making plans to strengthen user identification for currency dealers and for the origins of transactions. It is also considering expanding the scope of South Korea’s securities regulation to include virtual currency raises.

The move follows similar clarifying statements from Canadian regulators last week, confirming that cryptocurrency fund may be considered a security if it satisfies a four-pronged “investment contract test.”