On the Chinese ICO Ban

China’s central banking authority has banned ICOs. This decision seems to be very much a signal to Chinese crypto investors that China is opposed to the future narratives of cryptocurrency, but what does it say about the current state?

For China, cryptocurrency is a very complicated asset. On the one hand, provincial and state bureaucrats receive cryptocurrency as payments for allowing crypto miners to use state assets to further their economic systems (we see this in the case of governors who allow miners to receive power from a hydroelectric dam in exchange for a portion of the crypto-assets mined). This symbiotic relationship stretches far up the governance structure. On the other hand, the rulers of monetary policy see high net-worth individuals as using cryptocurrency to evade taxation and export money beyond the border of the republic in stark contrast to the decree of the ruling party. Exporting money from the mainland is strictly frowned upon but it’s next to impossible to isolate crypto to crypto movements to a physical location.

If I send money from one bitcoin address, let’s say at Huobi, to another address, it’s actually impossible for Huobi to verify where that address physically lives unless it’s on a list of known addresses. It’s totally possible that Huobi could maintain a list of known addresses, but for various technical and political reasons, that’s hard. The best effort most places can make is a checkbox pushing the assertion of the location of the destination onto the user, but that’s about as effective as coinbase’s famous “check this box if you’re a qualified investor” which was part of the problem with their flash crash (and now a defunct feature in their system). In short, tracking the movement of bitcoins beyond the addressing of the network is really hard.

Getting back to the narrative of why China banned ICOs, it seems that the rulers of monetary policy wish to impose a chilling effect on the movement of currency out of China, but not to the point of outright banning all cryptocurrency because of how much investment those same rulers have in the asset class. In short, Chinese state actors own too much cryptocurrency to outright ban it, but they want to stop more money from fleeing the country (and new actors from becoming members of the ruling class). It is this catch-22 that leads them to impose what is essentially a meaningless ban on new ICOs, since the wealthy will still be able to invest in new ICOs, while still allowing exchanges to traffic in the very assets which allow the movement of value out of the country.

It seems likely that what will happen is that exchanges will remain active in China and ICOs will move out of China. The net effect will simply be that China does not recognize any net economic benefit from the establishment of new currencies and, at the same time, does almost nothing to stem the movement of value from their shores. This decision is, in effect, the worst of both worlds.

Even if China were to ban exchanges from trading anything except Bitcoin and Ethereum, it would still do nothing to stem the flow of value from the mainland. Anything short of a full ban on cryptocurrencies is effectively missing the forest for the trees and it seems, given how many cryptoassets are owned by the ruling party, extremely unlikely that such a ban would ever come to pass. That is to say, Bitcoin and Ethereum are synonymous with the ruling class of China, so why allow any new currency to threaten the embedded power structures?