Quick Thoughts Recent China ICO Ban and Crypto-exchange Shutdown

by: Tam Ging Wien

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China’s central bank, The People’s Bank of China (PBOC) became the first country to outlaw ICOs or short for Initial Coin Offerings. South Korea has followed suit days after China. Countless other governments such as Singapore, Hong Kong, the US and UK have issued public warnings regarding ICOs.

ICOs are similar to IPOs. In an IPO a company raises funds from the public and list its stock on a publicly tradable stock exchange. In the case of an ICO, the company issues digital tokens to raise funding in cryptocurrencies and then list that digital token on a publicly tradable cryptocurrency exchange.

After this first move, China has also issued orders for Bitcoin and Cryptocurrency exchanges to shutdown by 30-Sep-2017. Exchanges are centralised marketplaces which allow people to convert fiat currency (such as USD, SGD, EUR, RMB…etc) to cryptocurrencies and vice-versa.

Interestingly, there is no explicit ban on mining. We suspect this is because mining of Bitcoins and other cryptocurrencies is a “commodity” producing function and these virtual commodities are then sold to overseas buyers creating an export economy an income generation for Chinese businesses. However China has concerns with locals converting their Yuan (or RMB) into cryptocurrencies because this allows them to transfer the money offshore quickly without control of the central bank. Therefore shutting down the exchanges will ensure that money does not get transferred out of the country without the purview of the central bank.

There is also no explicit ban on Over-the-Counter (OTC) trading in cryptocurrencies. So, savvy Chinese are trading crypto-currencies like Bitcoin through the WeChat messenging app. Will China move to also ban that too?

This indicates to us that China does not entirely oppose the use of cryptocurrencies and that the ban is a temporary measure to stop the outflow of money from the country. It also serves to protect investors from fraud and scams which are prevalent in the unregulated world of cryptocurrencies.

We therefore anticipate that the Chinese government will soon introduce new regulations and laws to govern virtual assets and cryptocurrencies. These regulations will likely include rules on how ICOs may operate and KYC/licensing requirements of cryptocurrency exchanges. They will also likely ring-fence the flow of cryptocurrencies.

The actions of the Chinese government has certainly created fear in the crypto-markets resulting in Bitcoin falling from its high of approximately US$5000 in August to a low of approximately US$3000 in September. It has since recovered to about US$4280 at time of writing.

For now, we will need to be patient to see if China releases any formal announcements of new regulations governing Bitcoin and other cryptocurrcies. Should the announcements be favorable and they issue licenses for cryptocurrency exchanges to operate, it will likely boost prices of Bitcoin once again.

Stay tuned, the show on cryptocurrcies it only just beginning.


Disclosure Statement

The views and opinions expressed herein are those of Tam Ging Wien (“the author”) and do not necessarily reflect the official policy, position or view of the author’s employer, organization, committee, or other group(s) or individual(s).

The author at time of writing hold stakes in various cryptocurrencies such as Bitcoin, Ethereum and Litecoin.



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