Major events of 2017 in the Asian ICO Market — Part 1: China

A three part exploration of the year’s developments for the major Asian crypto economies, and a glimpse at what 2018 may hold

The three major Asian ICO markets have offered different popular, commercial, and political responses to the risks and potential of ICOs. We will look at the different national approaches, from the most cautious and hard-fisted approach: China. Then the more middle ground of intervention: South Korea. Lastly, we will investigate the most “free-market” approach: Japan. Each of these countries faced different ICO market conditions, and each has taken different positions with varied justifications. In response to a perceived ICO fever the Chinese government acted swiftly in 2017 to issue a ban on all ICOs and cryptocurrency trading. South Korea followed shortly afterward with a ban on ICOs. These current bans, however, may be a temporary strategy used to buy more time for new regulations likely to come into play in 2018, though nothing has thus far been confirmed. Japan is yet to issue a ban but reminds token buyers to be cautious and vigilant.

Their strategies have caused significant impacts on the broader ICO space, and offer insights into the evolving conditions and backdrop that will be faced in 2018.

China

In the first half of 2017, according to the Beijing Internet Finance Association, Chinese companies launched 65 ICOs and raised US$398 million from more than 100,000 token buyers. Yet in July and August alone, the market exploded as Chinese ICOs raised US$766 million. Although very small in comparison to the wider Chinese economy — where first half IPO raises equated to US$22 billion — the ICO space was growing at an exceptionally fast rate.

On Sept. 4, China placed an immediate ban on all ICOs with the central bank describing them as “illegal public finance.” Differing narratives proposed that the ban reflected the government’s concern for retail investors, or a need to control the market. China clearly sees potential in cryptocurrencies. They are however, very cautious about it growing too fast within its tightly managed economy.

While the full range of underlying motivations for China’s cryptocurrency and ICO crackdown remains unclear, developments took place at a time when the Chinese government was particularly anxious to avoid social and economic unrest in the lead up to the Communist Party leadership reshuffle during October.

This controversial approach shook Chinese startups and was attributed to a 21% decline in the value of Ether.

Andrew Godwin, Director of banking and finance law from the University of Melbourne, points out how China’s extreme measures illustrate “how much of a threat they are perceived to be to the financial stability and social order in China. This recent crackdown suggests the Chinese government is determined to cement its place as a leading rule maker.” Joseph Lubin, founder of blockchain software ConsenSys, agrees “with China’s political approach. It made a lot of sense for them to pause things a little bit and get a better, deeper understanding of the ecosystem, and scare potential fraud perpetrators.”

While extensive ICO crackdowns forced almost a billion dollars back to Chinese token buyers, many Chinese companies are still launching ICOs. An example is Macau’s, Dragon Corp. They are looking to raise $500 million through an ICO by issuing tokens in Hong Kong instead of China. Many Chinese startups have therefore relocated to Europe or other parts of Asia where ICOs remain legal.

While China can imprison citizens for starting ICOs, they cannot access, confiscate or freeze people’s funds stored on the blockchain outside a centralized cryptocurrency exchange without an owner’s private key. Mike De’Shazer, editor of the Think Consortium on the Blockchain notes that ‘China has only done blockchain a favor by outlawing ICOs. They will prove that even the second most powerful government in the world cannot restrict blockchain adoption and the side economies emerging.’

Although China’s laws in various spheres are at times criticized for being draconian, Chinese financial markets are vast and incredibly challenging to control. The sheer scale of the Chinese economy makes it difficult if not fruitless to compare China’s decision to other countries with lighter regulations such as Switzerland or Isle of Man. Lubin believes that China’s actions are a reasonable temporary measure to avoid large counts of fraud and loss from the country.

Noelle Acheson at CoinDesk, notes “China’s regulators have a history of stepping in, slowing things down and then stepping back.” China is a tough rule maker. However, they recognize the need to adopt innovations to become an important player in global markets. Therefore, many analysts are expecting China to re-legalize some forms of cryptocurrency trading in 2018.

Part II: South Korea is available here, and Part III: Japan, and the Conclusion are available here.

Writing and Research by Cindy Huynh