The State Council， Chinas cabinet， has released draft rules to oversee fundraising by virtual currencies amid surging investor interest in cryptocurrencies.

The draft legislation， which builds on policies released in February 2016， was released by the State Councils Legislative Affairs Office in August. The policy document further clarifies the division of labor among regulators， and measures to prevent illegal fundraising as well as investigation procedures.

The proliferation of “initial coin offerings，” in which companies sell virtual “coins” to investors to raise cash， has led an official at the Peoples Bank of China to call for a regulatory framework to be created as soon as possible.

Digital Money Continues to Gain Popularity

In China， investors snapped up 2.6 billion yuan （$385 million） worth of new virtual currencies during the first six months this year， as digital money continues to gain popularity， a government-backed study finds.

New， unheard-of cryptocurrencies arrive in the market from time to time， adding to the long list that includes morefamiliar names such as bitcoin and ether. Some of these digital currencies are developed by companies to raise funds for new projects.

A companies offers an “initial coin offering” （ICO）， in which the issuer sells new “coins” to interested investors， just as an initial public offering provides new stock. In return， investors pay the issuer in cash or another virtual currency. Those “coins” can then be exchanged for rights to goods， services or even company equity.

Shanghai-based Energo Labs launched a new currency called TSL via an ICO in August that will enable peer-to-peer energy trading. Beijing-based Clipper Advisor， which automates asset management services， plans to launch a venturecapital unit and issue Clipper Coins， which give investors the rights of a limited partner.

Digital currencies have been quick on the uptake， according to a study by the National Committee of Experts on Internet Financial Security Technology， a government-backed industry organization.

Sixty-five ICOs were completed this year， the study said. Sixteen ICOs were concluded during the first two weeks of July， compared with 27 in the whole month of June， nine in May， eight between January and April this year， and five from last year. More than 100，000 investors have participated in these ICOs.endprint

The actual number of ICOs and investors involved could be much higher， as the majority of ICO-related transactions take place through private funds which the study did not track， an industry executive said.

ICOs are not regulated by Chinese law. Issuers of virtual currencies can raise funds without a lengthy review process. In fact， all these issuers need is a white paper detailing the function of the coin they are issuing and a platform to launch new virtual currency.

Over 90% of ICO issuances so far this year were purchased with other cryptocurrencies， putting the transactions outside of regulators reach， according to the study. But the unregulated sector is also full of risk， the association warned.

In addition to project failure and high price-volatility， many ICOs allegedly were used to scam investors， the study added.

An expert， who heads the Digital Currency Research Institute at the Peoples Bank of China， calls for a supervisory framework to be created as soon as possible.

There is no way to stem the growing popularity of ICOs， he said. He suggested creating a “safe space，” or so-called regulatory sandbox， for issuers or other financial-technology innovators to experiment new ideas without a full-scale launch. Regulatory sandboxes also enable the development of innovations under controllable limits.

Bitcoin Regulations to Block Money-Laundering

China is preparing to impose regulatory oversight on trading of Bitcoin to fight use of the electronic currency for money-laundering， a source close to the matter said. The new regulations would roll out next month.

China is the worlds third-largest Bitcoin market with 10% of global trading， behind 46% for Japan and 26% for the U.S. The central bank is drafting two sets of rules to regulate Bitcoin trading platforms and prevent the currencys use for money-laundering， said the source， who declined to be named.

The new regulations grow out of a months-long central bank inspection of the operations of major domestic Bitcoin trading platforms. Bitcoin trading caught the attention of reg-ulators since January after the value of the currency went on a roller coaster ride as investors sought to circumvent currency controls amid a decline in the yuan.

Chinese authorities have stiffened requirements on outbound yuan transfers since late last year to discourage flight of capital. Some investors have skirted the controls by buying Bitcoin onshore in yuan and selling it overseas for foreign currencies， according to a January report by Shenwan Hongyuan Securities Co.endprint

In early January the central bank initiated its probe of major Bitcoin exchanges and urged platforms to enforce foreign exchange regulations and rules against money-laundering.

Three of Chinas largest Bitcoin exchanges – Huobi.com， BTCChina， and OKCoin –halted Bitcoin withdrawals and started upgrading transaction systems in February to comply with the rules.

The central banks investigation identified misconduct related to Bitcoin trading and the platforms lax oversight on money-laundering， the source said. The bank will soon issue decisions on penalties for the exchanges， the source said.

After the new rules are in place， suspended Bitcoin withdrawals are likely to be resumed， the source said.

The price of Bitcoin has surged since April in China and overseas， boosted by regulatory moves by Japan， the U.S. and other countries.

On April 1， Japan officially recognized Bitcoin as a legal payment method acceptable by at least 260，000 merchants across the country. Later that month， Russias Deputy Finance Minister Alexey Moiseev told Bloomberg that the country is considering legalizing Bitcoin as soon as 2018， even though the Russian central bank banned use of digital currency in 2014 to defend the ruble.

Optimism in the market has also grown as the U.S. Securities and Exchange Commission decided to reconsider whether to approve a Bitcoin exchange-traded fund that would be the first product of its kind in the U.S.

Official Digital Currency not Yet to be Issued in China

China is not yet ready to issue an official digital currency of the nation， nor has it authorized any institute to do so. This is according to Chinas central bank， which made the statement to address rising digital currency fraud and virtual currency prices.

According to a notice issued by the Gold and Silver Bureau of the Peoples Bank of China （PBOC）， the so-called digital currency in the market now is not legal， as the central bank has not yet issued a legal currency.

The PBOC said at a January seminar that it will issue official digital currency as soon as possible. Zhou Xiaochuan， governor of the central bank， elaborated that the digital currency issued by the PBOC will be mainly responsible for replacing cash， so as to bring down costs and improve the efficiency of circulation.

The concept of digital currency is increasingly popular， especially as certain forms like Bitcoin gain value. The PBOC warned that some institutes and companies promoting digital currency are likely perpetrating pyramid schemes or other fraud. As early as 2013， Bitcoin was classified as a virtual com- modity rather than a legal currency.

Issued by the Jiangsu Internet Finance Association in April， a report on Chinese internet pyramid schemes observed that there are over a dozen digital currencies in China， all of which are “illegal pyramid schemes in the disguise of digital currencies.”

In May， a court in Peixian County， Jiangsu province sentenced a man to four years in prison for organizing a pyramid scheme in the name of promoting “Markcoin” and “Vikcoin.”The organization turned out to have lured hundreds of thousands of clients， and the amount of money involved potentially reached hundreds of millions of RMB.endprint