ICOs Based in China: A Concern for Investors?
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ICOs are fast becoming one of the most important financing channels for Blockchain and other fintech startups. This is no less true in China, where — according to data from China Internet Security Technology Commission— the cumlative ICO fundraising value reached RMB2.6 billion (US$420 million) as of July 2017. Most ICO platforms were located in the financial powerhouses of Shanghai and Beijing.
Like every other nation, China currently has no specific regulations governing ICOs. Nonetheless, the startling growth of ICOs and the risks associated with them are beginning to attract the attention of regulators. This may be a concern for potential investors who fear an upcoming crackdown on ICOs or new regulations that makes associated platforms and exchanges unusuable. This post argues that these fears are misguided: China in fact constitutes a friendly environment for crypto-assets, Blockchain related startups and other financial innovations, including ICO.
Cryptocurrency controls?
The most recent official statement relating to cryptocurrencies by the central government of China was made on December 5th 2013, published by the People’s Bank of China (PBoC) and four other central government agencies. The document states that
从性质上看，比特币应当是一种特定的虚拟商品
“Bitcoin is a type of commodity”
普通民众在自担风险的前提下拥有参与的自由
“Ordinary people have the freedom to participate in trading it.”
So far so good for cryptocurrencies in China. A further encouraging sign is the sheer volume of Bitcoin trading that takes place in China: Research indicates that as of January 2017 the Chinese market accounts for over 80% of the global trading volume in Bitcoin. This share has been growing almost continuously since 2012.
Given these two facts, why might there be an impression that the Chinese government is hostile to cryptocurrencies? Two incidents, and the way they were covered in the Western media, seem to have had the biggest impact:
(1) In April 2014 the PBoC ordered a halt on bank deposits into a number of cryptocurrency exhanges.
(2) In February 2017 China’s two largest Bitcoin exchanges froze withdrawals of Bitcoin after warnings from the PBoC. The halt on withdrawals came after weeks of increased scrutiny relating to Bitcoin by Chinese regulators.
Such measures might be thought a warning sign that China will become an inhospitable environment for cryptocurrencies in the future, especially given the way they were covered in the media (endless talk of “impending crackdowns” and the like).
The truth is less dramatic: With respect to (1) the halt was ordered in response to foul-play by certain exhanges offering 0% trading fees and excessive leverage. The PBoC deemed that risks for investors of extreme volatility and market manipulations were too high. With respect to (2) the freeze on withdrawls was the result of certain exchanges’ failure to remain compliant with rules on Anti Money Laundering. The exchanges enabled withdrawals shortly after along with sensible new rules to “prevent and attack the exploitation of Bitcoin for money laundering, foreign exchange conversion, pyramid schemes and other illegal behaviour”.
In neither case were any trading platforms shut down and the PBoC was clear that this would happen only if serious violations were discovered. Thus, the measures imposed by the PBoC were a proportional and sensible response to the possibility of exploiting cryptocurrencies; they are not evidence of a regime hostile to cryptocurrencies in general.
All we really learn from these cases is that the PBoC appears especially keen on risk management; but that ought to be an attraction rather than a deterenet to serious players in financial innovation.
ICOs
The risks to investors relating to the explosive growth of unregulated ICOs are obvious. Paramount amongst them are investments risks — especially relating to the status and liquidity of individual tokens; and security risks — especially relating to cases of hacked exchanges and exploited smart contracts. As with the US, the regulatory uncertainty surrounding ICOs in China may be a concern for potential investors in Chinese based platforms.
Again, however, the evidence indicates that Chinese regulators are open to to this form of financial innovation, so long as risks are well-managed. It is especially important to emphasise this in the current climate of scaremongering about China by some journalists in the cryptocurrency community.
The best evidence we have about the current thinking of Chinese authorities on ICO regulation comes in the form of an article written by Yao Qian, Director of the People’s Bank of China Digital Currency Research Institute. (A translation of the full article may be found here). Strictly speaking, the article represents Yao Qian’s personal point of view and “shall not be regarded as that of the organisation he works for”. Nonetheless, given his position, it is clear that his ideas are likely to reflect key aspects of future policy.
Yao Qian recognises that “[it] will take a long time for cryptocurrency ICO to get a clear legal positioning and the establishment of a complete and mature regulatory framework”. However, he notes that waiting for regulatory certainty will “delay the listing time of Fintech innovations by 1/3, consuming 8% of the income of the product’s life circle [sic], downplaying corporate valuation by 15%.” This would undermine China’s competativeness in “global financial science and technology innovation”. Thus, he concludes “it is advisable to implement regulatory sandbox policy for ICO”.
A regulatory sandbox is a set of rules that allows innovators to test their products in a live environment with relaxed regulatory requirements (but often with some predefined limitations). The purpose is to encourage innovation, to assess the potential benefits and risks and to create a solid evidence base for making future regulatory decisions. In the current context, his idea is to create a safe innovation space for ICO projects to work without becoming overburdened with concern for regulatory consequences: “[It’s] suggested to be tolerant of ICO and give some inclusive immunity in terms of listing approval, investor restrictions, publicity and promotion of the project”.
Thus, the evidence indicates that the Chinese authorities are open to ICOs; they intend to encourage this form of financial innovation so long as risks are well-managed. Importantly, there is no evidence of an impending crackdown. And there is certainly no evidence of the kind of penalties for ICO participation that have been gossiped about on some crypto news sites. Indeed, Yao Qian’s policy ideas seem well-adapted for the need to protect investors without imposing a regulatory burden that crushes fintech startups and impedes innovation.
LakeBanker and LakeBTC
The main purpose of this post was to give an overview of the current regulatory situation for cryptocurrencies and ICO in China. However, a second purpose is specific the LakeBanker project. Phase 1 of our Token Sale is active now ahead of our main sale in mid-October.
LakeBanker is a spinoff of cryptocurrency exchange LakeBTC. The latter is currently headquartered in Shanghai, China with plans to open further offices in Hong Kong, London and elsewhere. Our connection with LakeBTC is a significant asset for the future LakeBanker system. In light of the evidence presented above, investors ought not be concerned about the future of the LakeBTC platform in terms of its location in Shanghai, nor the status of the LakeBanker ICO we are currently running.
LakeBTC is aligned with the Chinese authorities in its emphasis on risk managment. Its reputation for security and reliabilility is second to none. Security risks are well-managed (for specific security protocols see our whitepaper, section 3.3). Further, LakeBTC has always enforced strict KYC on its users and has never enabled margin/short or futures trading. It was thus unaffected by the measured taken by the PBoC mentioned in (1) and (2) above.
The LakeBanker system will inherit this expertise in risk management from LakeBTC. Further, our BAC token is well-integrated into our business model and we offer investors near immediate liquidity: trading for BAC will be enabled on LakeBTC.com before November 1st 2017. Thus, from the point of view of security risks and investment risks the LakeBTC platform and the LakeBanker ICO are very unlikely to raise any red flags for the Chinese authorities, whatever the outcome of their deliberations.
