Chinas Cryptocurrency Crackdown

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What's going on?

China has declared Initial Coin Offerings (ICOs), a mechanism for funding through cryptocurrencies, illegal. Of the 100 biggest cryptocurrencies, 94 fell in value!

What does this mean?

A lot of companies have been raising money through ICOs (by offering their new cryptocurrencies to investors in exchange for existing cryptocurrencies or cash), and in the last few months the amount of fundraising has shot up exponentially. However, unlike traditional fundraising methods, ICOs have been largely unregulated. This presents a problem for governments and central banks as they try to assess the effects on investors and the financial system. China is concerned about ICOs being used to fund criminal activity and perpetuate fraud.

Recently, Australia, Japan, Russia and South Korea announced plans to regulate cryptocurrencies, which would legitimize them even if it would require increased administrative costs (like better user verification). Chinese regulators werent as permissive and banned ICOs altogether how far other countries will go is yet to be seen.

Why should I care?

For markets: Cryptocurrencies fell across the board.

If governments prohibit raising money through ICOs, it suggests that they might also more heavily regulate existing cryptocurrencies this would limit their legal uses and thus hurt their value to investors. That risk appears to have affected popular cryptocurrencies on Monday, with bitcoin down 4%, ethereum down 13%, ripple down 8% and litecoin down 13%.

For you personally: Cryptocurrencies are yet another investment option for individuals, but they carry their own set of risks.

There is a trend of people having increased access to investment and fundraising options enabled by technology, like peer-to-peer lending, crowdfunding and robo-advisors all of which offer options that were previously only available to institutional investors like banks and investment funds. Perhaps cryptocurrencies are simply another one of these options… or perhaps, as regulators may worry, they are tools of financial manipulation that will ultimately harm individual investors.

Originally posted as part of the Finimize daily email.

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