(Yicai Global) July 7 -- Virtual currencies are not money in essence, and investors should be reasonably cautious towards initial coin offering (ICO) projects, an expert from China's central bank said in an interview with Yicai Global.
Blockchain companies and decentralized organizations raise funds for their projects by selling cryptographic tokens to early backers during ICO campaigns.
Bitcoin lacks the value basis of a legitimate currency, said Sheng Songcheng, a counselor at the People's Bank of China.
Bitcoin is a string of code generated through a complex algorithm, and does not have inherent value, Sheng said. Being virtual is the most salient characteristic among virtual monies, and whether bitcoin can serve as a medium of value exchange completely depends on trust in it, he said. Virtual currencies have technical value and are therefore an asset, he said.
The deflationary nature of virtual currencies means that they can hardly function as a medium of exchange in modern economies, he said. "Bitcoin will reach its supply ceiling of 21 million in 2140. If it is accepted as standard money, that will inevitably lead to deflation and constrain economic growth."
"Virtual currencies are highly volatile, and fluctuations in their prices can easily reach 10 to 30 percent," Sheng said. "If a country accepts one of them as its national currency, the entire national economy could collapse due to currency volatility. Project financing based on a volatile virtual money also entails risks."
Serving as a medium of commodity exchange is the defining characteristic and the most fundamental function of currencies, Sheng said.
In dealing with ICOs as a new financing method, the government should warn investors of relevant risks, while encouraging healthy innovation, he said.
"Only time and market dynamics will tell how popular blockchain technologies and ICOs will become in the future," Sheng said. "Moderate regulation should be applied, but it should not stifle innovation."
Current problems with ICO schemes mainly stem from the absence of uniform information disclosure standards and procedures, he said. Some projects were overhyped and were not subject to effective supervision and regulation after the financing stage.
Many funding platforms exploited these loopholes, leading to rampant speculation in the market, Sheng said. Therefore, information disclosure requirements and moderate regulation for ICO projects must be introduced, he said.