China’s Ban of ICOs and Bitcoin Exchanges - A Reaction
Simon Taylor
Co-founder 11:FS & CPO 11:FS Foundry
TL;DR We’re witnessing political theatre to limit the amount of scams happening in the ICOs and Token bubble in China (and globally), it’s no surprise regulators have reacted. I expect normal service will resume soon(ish) and as ever finding a *good* ICO to invest in is far better than any old ICO will do… PS: This is not investment advice.
On Monday morning, Chinese regulators, led by the PBOC, released a joint statement where they outlined that going forward ICOs will be considered illegal in China as part of a major crackdown on public financing. Since then there have been less substantiated reports of a coming ban on Bitcoin Exchanges. These moves have had a dramatic effect on the price of crypto-currencies and the new “tokens” that have been the source of giant hype and investment spike in recent months.
What are ICOs?
ICOs, or Initial Coin Offerings, are a fundraising practice where companies make vast amounts of money from private investors, also known as token sales, where tokens can be redeemed against the eventual company offering when it launches (in a similar way to tokens for fairground rides). What are they fundraising for? Some are selling shares in the company, some are selling tokens for rides and others are just trying to make a fast buck and have no end product at all. Many individuals or companies have made a lot of money very quickly by means of ICOs, so far in the first half of 2017 alone, over $1bn has been raised, and over $400million to date in China alone, making it one of the biggest players in the industry.In the first half of 2017 alone, over $1bn has been raised, and over $400million to date in China alone, making it one of the biggest players in the industry.Last week, the National Internet Finance Association of China warned against the rise of ICOs, claiming they were disrupting the social and economic order and posing a risk to the financial system. In addition the reports about Bitcoin Exchanges being potentially banned have given weight to the idea that international regulators may not be far behind.
What does this regulation mean going forward?
With many now concerned about the Securities and Exchange Commission in the USA and other global regulators cracking down on token sales, what does this mean for the future of the industry? Will token sales continue to be the huge money-making industry they have been to date, even with increased regulation? What will change going forward? As Patrick Murck said on Blockchain Insider what this announcement and growing concerns over regulation proves, is that if you’re doing an ICO you need to be smart. Good practices include:- Only sell to registered investors
- Be clear about what your token is for
- Ideally your token “proves” something or has an obvious use in a decentralised system
1) Is this the end for the ICOs?
The China crackdown impacts most tokens and exchanges already based there, tokens such as NEO and EOS who would fall within the jurisdiction of the PBOC neatly, as well as Chinese exchanges that carry those tokens such as BTC-e. We have seen this before, with threatened bans of Bitcoin exchanges ~ 6 months ago only for them to continue to operate albeit without as much margin trading activity. My conjecture is that the Chinese regulators are looking for concessions from those producing ICO’s and the exchanges themselves, and when those are secured normal service will resume. Indeed, TechCrunch published an article this week that stated that quarter on quarter fundraising for ICOs is at an all time high and Q3 2017 looks to break all records to date. However the long term implications of this move by China and how global regulators will react remains to be seen.2) Is regulation of ICOs actually a bad thing?
The general mania for ICOs slowing down is probably a good thing. Such as spike of investment doesn’t guarantee all of that investment is legitimate, many people have and will continue to be scammed. Legal enforcement can weed out illegitimate ICOs, dissuade potential scammers from setting up an ICO or those that have not fully thought through their offering or sought appropriate legal advice regarding compliance.The general mania for ICOs slowing down is probably a good thing.In theory, the fear, uncertainty and doubt (FUD) created in the wake of this announcement should encourage greater due diligence on the part of future ICO creators, ahead of them publicly seeking funds, in order to ensure that the only token sales out there are the ones that are being done properly and with appropriate compliance. Ultimately, if you’re on the right side of the law you’re fine, but when it’s such a grey area knowing how to be that requires doing your homework!
3) Will other countries crack down on token sales?
ICOs popularity can be seen in the vast sums raised for new cryptocurrencies or tokens, including Filecoin, Tezos and many more. However these are not without risk, and many have lost money. The most prominent example being the DAO, a $150million raise that was hacked and ultimately lost $60million of their (and their investors’) money. Without regulation anyone can invest anything, and likewise their assets cannot be protected. In the event of a hack, there is no governing body to ensure people are appropriately reimbursed. Token sales have been described as the “wild west” of the crypto-space, where currently anything goes and everyone is lawless.Token sales have been described as the “wild west” of the crypto-space, where currently anything goes and everyone is lawless.China have taken the most impactful step into trying to control this “final frontier” and it is highly possible other countries might do the same. The SEC in the US already made a start when it ruled that some tokens can be securities and therefore can be treated as such under the law, but it has not yet enforced any legality. The fact that is has made public statements to the effect that it could legislate if it needed to, is the beginnings of trying to tame this market… Although my view is it will be several months if not a year or so before we see this really shake out.
Where does this leave us now?
Well, the core drivers of value in the industry remain in blockchain and cryptocurrency. Namely, that new business models are emerging and investors are gaining access to a new asset class. ICOs are not likely to replace existing well trodden fund raising routes, but will continue to exist as an alternative to them, just possible under stricter regulation. In the same way mobile hasn't rid the world of laptops. It has created its own category.Mobile didn't kill desktop. It added to internet time.
Blockchains won't kill banks. They will add more economic activity on top of them. pic.twitter.com/22BXDpdpLX — Richard Burton (@ricburton) 5 September 2017
ICOs are not likely to replace existing well trodden fund raising routes, but will continue to exist as an alternative to them, just possible under stricter regulation.If you’re in an asset manager waiting to get into the ICO space, my view is that there are good investments out there you just have to be extra careful to look for the good ones. Not all ICOs are created equal! To keep on up to date with all the twists and turns as they unravel make sure you subscribe to Blockchain Insider where we will discuss this every week with leading industry experts.