Our views on Chinese ICO Ban — its impacts and what you can do
The People’s Bank of China has released a statement on 8th September 2017 regarding the ICO ban which can be summarized as follow:
- Financing through coin offerings, raising virtual currencies such as Bitcoin or Ethereum from investors are considered unauthorized and illegal public fundraising activities
- Fundraising through coin offerings shall be banned immediately, any coins already raised shall be returned to investors
- Exchange platforms shall not engage in exchange businesses between legal tender and token or “virtual currency”
- Financial institutions and non-bank payment institutions shall not engage in services (e.g., account opening, registration, trading, settlement, etc.) that support ICOs activities
The statement has an immediate impact on crypto asset prices, with China-focused coins such as NEO and Binance Coin taking a big hit. The overall negative market sentiment also pulled down the price of most other crypto assets.
We believe that the ban in China will be temporary and this is our base case scenario when we consider the longer-term impact. To us, it makes sense for Chinese government to put a break on ICOs for several reasons:
- Investors will get hurt, undermining government legitimacy: given the current unregulated environment, many ICOs today are scams, channel for money laundering, or projects with no real use-case and little chance of success. Many inexperienced investors will get hurt and lose money to these schemes. This can potentially cause public dissent, undermining the government legitimacy for not having intervened sooner.
- Chinese government has no slice in the pie: money going into ICOs must come from somewhere; a large portion of it likely to come at the expense of other regulated investment vehicles like stock and gambling money at casinos. While government gets a cut from those regulated activities through tax and licenses, they do not benefits from money flowing into ICOs.
We believe the ban will be temporary for the following reasons:
- They did it before with Bitcoin: in 2013, PBoC has forced exchanges to stop BitCoin deposits of Yuan causing its price to plummet 50% overnight. Not long after in 2014, exchanges found workarounds and trading resumed with Bitcoin price bounced back 100%
- We have seen a U-turn in policy elsewhere: a perfect example is Russia where a previous proposal was to punish crypto asset owners with jail time up to 7 years. Now, in a complete reversal, crypto assets have full support of Vladimir Putin who wants the rules governing ICOs to be in place by end of this year. The announcement strategically came right after Chinese ban, surely to promote Russia as a regulatory-friendly place for blockchain projects, which leads to our next reason…
- China will not be left behind: blockchain is a revolutionary tech, and banning ICOs long-term would stifle advancement of legitimate projects that could become future drivers of Chinese economic growth.
- Difficult to enforce fully: people will find a way to circumvent the regulations. Projects will simply flee to other regulatory-friendly countries; new trends such as decentralized exchange will also make it difficult for government to simply just shut it down.
So what impact does all this mean to the market and what can you do?
Short-term impacts:
1 ) Continued volatility in the market: FUD will continue for some time as people digest the news and form opinions on what this all means. Many actors will try to benefit from investors’ emotion by spreading false rumors and misinformation. Asset price could continue to go down as Chinese investors cash out from fear of exchange shutting down.
- What you can do: Don’t panic and fall prey to FUD. Be vigilant. Read news from multiple sources before trusting it. Take the long-term view. Some coins with good fundamental actually hold up well in this environment. It is a good time for you to re-evaluate the reasons why you bought some of your tokens in the first place
2 ) Less demands in upcoming ICOs: Investors might become more cautious and contribute less than initially planned on upcoming ICOs. ICO might ban participants from China reducing the overall demand. If not banned, Chinese participants could contribute less due to fear of exchange shutting down.
- What you can do: Opportunity to get in on ICOs with strong value propositions and promising technology. Less demand from the public on some popular projects could mean a chance for you to contribute a higher amount into these projects or buy them at a not-so-inflated price once they hit exchanges.
3) Follow-up by other regulators: US (SEC) and Singaporean (MAS) regulators could follow suit and ban ICOs. We think a complete ban scenario is unlikely, and if it happens at all will take time. Singapore is well-known for being regulatory friendly and they want to attract investors. SEC will likely to only take actions on tokens that are considered securities. Further more, high-quality projects with domicile in US and Singapore have operated much more cautiously with strong legal consult from the beginning reducing their legal risks.
- What you can do: For coins that you have invested or planning to invest, study to understand the likelihood of them being classified as securities. You can look at Howey Test — which is a list of questions to evaluate whether token is a security. To give you a concrete example, Enjin Coin has published their result here. If your coin is likely to be classified as security, it could be subjected to security regulation in the future
Medium to long-term impacts:
1 ) Decentralize-focused projects to benefits: we all agree decentralized exchange concept is good, and the community is moving in that direction. This incident will strengthen its case, accelerating development effort and interests from public. Projects such as 0x and Kyber could become direct beneficiaries.
2 ) More legitimacy to the crypto community, attracting new money: a lot of people in my network (urban, university graduates, young professionals) which tends to fall in the early adopters / early majority groups for new tech are still skeptical of blockchain. Many believe it is a ponzi scheme or that its only use are for criminals to launder money. Some form of regulations would benefit our community as it will:
- Weed out scammers and bad actors, leaving us with a pool of higher quality invest-able projects
- Provide confidence to general public, attracting new money to the crypto ecosystem
3 ) ICO / Crpyto havens established: we could start to see jurisdictions come out to promote its accommodating policy towards ICOs and crypto assets. We have mentioned Russia with a U-turn in its policy earlier, but there could be other jurisdiction that will eventually become an equivalent of Cayman Islands for crypto world.
Crypto community is known for its resiliency to government crackdown — There have been examples of Bitcoin ban in China, Russia, Thailand, and Vietnam and Bitcoin took a big hit in the short term. Look at where we are now. The community is more vibrant than ever. Chinese government used to prohibit deposit of Yaun and those exchanges found way around it — e.g. use voucher instead of direct deposit. I would like to end the article with some words of wisdom: Life finds a way — this too shall pass.
Main Contributor: Todsadol Rungswang
Disclaimer: This article constitute our opinions and is for information purposes only. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. It is not intended to be an investment advice. Seek a duly licensed professional for investment advice.
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