The rapid rise of blockchain technology has sparked global interest—and intense regulatory scrutiny. In recent years, Initial Coin Offerings (ICOs) surged in popularity as a novel fundraising mechanism for startups leveraging blockchain. However, their unregulated nature soon raised red flags. In September 2017, Chinese regulators abruptly halted ICO activities, marking a pivotal moment in the country’s approach to digital assets.
In an exclusive interview with China Business News, Sheng Songcheng, Advisor to the People's Bank of China and Executive Vice President of the CEIBS Lujiazui International Financial Institute, shed light on the rationale behind the crackdown, the future of cryptocurrency trading, and the importance of fostering blockchain innovation.
Why ICOs Were Suspended: Protecting Investors and Ensuring Market Integrity
ICO—short for Initial Coin Offering—is a method through which blockchain-based startups raise capital by issuing digital tokens in exchange for established cryptocurrencies like Bitcoin or Ethereum. While structurally different from traditional IPOs, ICOs share similarities with equity crowdfunding, particularly in their one-to-many fundraising model.
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Sheng Songcheng explains that while ICOs represent financial innovation, they also carry significant risks. "From a legal perspective, many ICOs resemble unauthorized public offerings or securities issuance," he notes. "Without oversight, these projects expose investors to massive risk—especially when the underlying ventures lack feasibility or are outright fraudulent."
Indeed, the market saw a flood of so-called “air tokens”—digital assets with no real utility or technical foundation. These speculative instruments attracted retail investors, including inexperienced participants drawn by hype rather than substance. This environment created a classic case of Gresham’s Law: bad projects drove out good ones, undermining trust in legitimate blockchain entrepreneurship.
Regulators responded with what Sheng describes as "substance-over-form" supervision—a regulatory philosophy focused on economic reality rather than technical classification. By halting all ICO activity and requiring a reset, authorities aimed to eliminate fraudulent schemes, protect retail investors, and lay the groundwork for a more transparent ecosystem.
This approach was not about stifling innovation but about risk containment and market correction. According to Sheng, serious blockchain entrepreneurs and investors actually welcomed the move. Clearing out scams allows genuine innovators to thrive without being overshadowed by get-rich-quick schemes.
Bitcoin Trading Should Be Regulated, Not Banned
With ICOs suspended, attention turned to cryptocurrency exchanges—particularly Bitcoin trading platforms. Could they be next?
Sheng acknowledges that completely banning Bitcoin transactions is impractical. "Bitcoin is the most prominent application of blockchain technology," he says. "It operates globally and can be traded offshore or over-the-counter, making total prohibition ineffective."
Instead of elimination, Sheng advocates for targeted regulation. He emphasizes three key concerns:
- Anonymity and capital flight: Bitcoin enables peer-to-peer anonymous transfers, posing challenges for China’s capital account management and anti-money laundering (AML) efforts.
- Price volatility: Bitcoin has experienced extreme fluctuations—rising rapidly and falling sharply—posing systemic risks if widely adopted without controls.
- Misconceptions about its monetary role: Despite its name, Bitcoin does not function as legal tender.
As early as 2014, Sheng published two influential papers—"Virtual Currencies Are Not Money: The Case of Bitcoin" and "The Utopia of Denationalized Money and Bitcoin"—arguing that cryptocurrencies lack essential monetary characteristics. They are not backed by sovereign credit, cannot support macroeconomic policy, and fail to provide stable value storage due to deflationary design (e.g., Bitcoin’s 21 million cap).
Therefore, while individuals may hold or trade Bitcoin, it should never replace central bank-issued currency. Regulatory efforts should focus on curbing illegal use—such as money laundering or illicit financing—while enhancing KYC (Know Your Customer) protocols on exchanges.
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Some progress has already been made: major exchanges have phased out margin trading, introduced transaction fees (~0.2%), and strengthened user verification—steps aligned with global best practices.
Blockchain Technology Must Be Encouraged
Despite regulatory actions on ICOs and cryptocurrencies, Sheng stresses that blockchain technology itself remains a strategic opportunity.
"Blockchain enables decentralized record-keeping that reduces costs and increases efficiency across industries," he explains. From supply chain tracking to smart contracts and digital identity, its potential extends far beyond finance.
Countries worldwide are investing heavily in blockchain R&D. Ethereum alone hosts hundreds of decentralized applications (dApps), spanning finance, healthcare, logistics, and governance.
China is well-positioned to lead. With widespread mobile internet adoption and strong tech infrastructure, domestic innovation has flourished. Blockchain-powered e-commerce, BaaS (Blockchain-as-a-Service), and charitable fund tracking systems have emerged—some representing world-first applications.
Notably, between 2008 and 2017, China filed 550 blockchain-related patents, surpassing the United States (284) and ranking first globally. Tech giants like Alibaba, Tencent, Baidu, Ping An, and Wanxiang are actively involved, alongside numerous startups and industry alliances.
However, rapid growth brings challenges. The complexity of blockchain makes it easy for bad actors to disguise scams as innovation. Sheng estimates that up to 90% of ICO whitepapers describe non-viable projects, many bordering on pyramid schemes.
That’s why timely regulation is essential—not as a barrier, but as a safeguard. Proper oversight ensures that blockchain evolves into a trustworthy, scalable technology capable of solving real-world problems.
Frequently Asked Questions (FAQ)
Q: Why were ICOs banned in China?
A: ICOs were suspended due to rampant fraud, lack of investor protection, and risks to financial stability. Many projects were speculative or deceptive, leading to calls for regulatory intervention.
Q: Is Bitcoin legal in China?
A: Bitcoin is not illegal to own or trade personally, but financial institutions are prohibited from handling it. Trading occurs primarily offshore or peer-to-peer under limited oversight.
Q: Can blockchain exist without cryptocurrency?
A: Yes. While many blockchains use tokens for incentives or access control, enterprise-grade blockchains (like permissioned ledgers) often operate without public cryptocurrencies.
Q: What makes blockchain valuable beyond speculation?
A: Its core value lies in transparency, immutability, and decentralization—useful for supply chains, voting systems, intellectual property tracking, and secure data sharing.
Q: Will China develop its own digital currency?
A: Yes. The People's Bank of China has been researching a Central Bank Digital Currency (CBDC), emphasizing state control over monetary issuance and policy effectiveness.
Q: How can investors distinguish real blockchain projects from scams?
A: Look for clear use cases, technical documentation (e.g., GitHub activity), experienced teams, and regulatory compliance—not just whitepapers or celebrity endorsements.
The path forward lies in balance: curbing speculative excesses while nurturing transformative technology. As Sheng Songcheng underscores, technology should serve society—not replace sovereign economic governance. With smart regulation and continued innovation, blockchain can fulfill its promise as a foundational tool for the digital age.