On 4th September 2017 China outlawed ICO’s and issued a statement “ICO financing refers to the activity of an entity raising virtual currencies, such as bitcoin or ethereum, through illegally selling and distributing tokens. In essence, it is a kind of non-approved illegal open fund raising behavior, suspected of illegal sale tokens, illegal securities issuance and illegal fund-raising, financial fraud, pyramid schemes and other criminal activities.”
The decision was jointly taken by the Central Network Office, People’s Bank of China, the State Administration for Industry and Commerce, the China Banking Regulatory Commission and the Ministry of Industry and Information Technology in lieu of multiple crypto scams in the country.
Let’s analyze China’s ICO ecosystem to get a better understanding.
As per a report by Bloomberg, about $398 million million were raised by 65 ICO projects in China. Another report published by Ernst and Young in November 2016 stated that China “leapfrogged ahead to become the undoubted center of global FinTech innovation and adoption. The speed, sophistication, and scale of development of China’s FinTech ecosystem have been at a level unmatched in more established markets.”
The ICO ban came as a shock to all cryptocurrency investors, miners and enthusiasts. Several “theories” have been put forth like
- ICO ban is an extreme control mechanism to cool off the cryptocurrency craze in the country temporarily. Though it could have differentiated ICO’s trading in unregistered securities from decentralized app based tokens instead of considering all of them illegal. An investor at Union Square Ventures, Fred Wilson stated “many have speculated that this Chinese ban is temporary to give the Chinese authorities time to come up with sensible regulations. I suspect that is right.”
- ICO’s were posing a threat to incumbent businesses.The major red flag was lack of a centralized or state control. ICO bypassed regulations and paved way for new accessible venture capital that may have threatened the incumbent businesses.
- Existing cryptocurrencies weren’t giving a monopolistic advantage to any nation. China may mine its own cryptocurrency to have more control on cryptocurrency market after banning all ICO’s.
On a global level, Ethereum’s market cap dropped by $6 billion within 24 hrs of the ban and price of bitcoin also dropped by $200. Immediately after China banned ICO, its alliance with Russian cryptocurrency platform KICKICO got delayed. Until new regulations are made for ICO’s are made the “Chinese-Russian Cryptocurrency Alliance” is on hold. As per sources, People’s Bank of China may also freeze bank accounts associated with ICO’s.
Will regulation bring more legitimacy to the cryptocurrency market?
“A regulated ICO market, with proper checks in place, could draw in professional investors” : Syed Musheer Ahmed (FinTech Association of Hong Kong).
Unregulated ICO’s may at times provide misleading information, adopt unfair business practices, may not design token features well and may make smart contract vulnerable to hacking. Regulations may be expensive but they could bring in long term benefits. A regulated ICO market may bring in more professional investors and more capital thereby enabling companies to raise more money.
Alternative school of thought : Regulations may impair cryptocurrencies
Some believe that regulations would undermine cryptocurrencies by removing privacy. This may result in cryptocurrencies losing their independence in terms of decision making, anonymity and decentralized governance and move towards more centrally dictated intervention of governments and banks. Any poorly planned regulation may prove to be detrimental than beneficial.
Other countries take on ICO’s
Estonia : Despite being a small country Estonia is considering issuing crypto tokens called “Estcoins” via an initial coin offering. Their government officials are in conversation with Vitalik Buterin, founder of Ethereum. Speculations are that the money raised can be jointly managed by private companies and the government and in future emerge as an option of choice in terms of digital payment on domestic as well as global level also providing high return on investment to participants in ICO.
Switzerland : Switzerland has a favorable environment for cryptocurrencies to flourish. The regulatory body of Switzerland is Swiss Financial Market Supervisory Authority. It identifies cryptocurrencies as assets and cryptocurrency companies don’t require specific license or approval to operate.
Singapore : As per MAS(Monetary Authority of Singapore) cryptocurrencies are assets. The virtual currency transactions aren’t regulated however KYC and AML are monitored.
UK : UK tests out new financial projects under a regulatory sandbox. The Financial Conduct Authority (FCA) is exploring the distributed ledger technology and at of now considers cryptocurrencies as private currencies.
Canada : Autorite des marches financiers (AMF) is the regulator for financial institutions and it is striving to explore the adoption and usage of cryptocurrencies via sandbox method. Sandboxes help to jumpstart projects (usually Fintech) that do not fall under the norms of fiat currency.
USA : Recently SEC (U.S. Securities and Exchange Commission) has announced token sales and ICO’s to be subject to federal laws. Earlier the 50 states have their own independent cryptocurrency rules such as BitLicense to regulate ICO’s and cryptocurrencies.
All nations are struggling to make regulatory framework to accommodate cryptocurrencies in their economy and China is no exception.
Nick Evdokimov, Los Angeles-based ICO technology and consulting expert states “It may be too early to make this prediction, but the China ban will redirect the Chinese flow of ICO orders to global agencies. ICOs may be dead in China, but they’re not dead here.” It might be possible that companies will turn toward more cryptocurrency friendly nations with practical regulatory framework for business.
Perhaps China would establish regulations and resume ICO’s in future. The ban has also paved way for regulation technology or “regtech”.It is noteworthy that the intention of the ban is not to stop the blockchain revolution but it was aimed at safeguarding the investors. It can hence be summed up that though China has banned ICO’s at the moment to prevent scams but ICO’s are here to stay.
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