There’s been significant talk recently about the tumultuous cryptocurrency markets, and I wanted to share my personal thoughts on the recent news regarding ICOs being banned in China on September 2nd (China timezone). Many misconceptions arose from the confusion caused by the announcement, therefore the central government clarified subsequently on September 6th (China timezone) that:

1. ICO *could* be illegal, and it’s status is still under determination

2. China will *temporarily* pause ICO public sales at this moment, but private sales are still allowed. In addition, China will continue to encourage blockchain technologies and expect wide adoption of such technology in the Chinese market.

The blockchain industry in China has made significant progress over the past few years. Over the most recent Labor Day weekend, the cryptocurrency markets were hit hard as news of the ICO ban made its rounds across the internet. However, some people saw the ICO ban as a positive sign for the market. Some believe that over 90% of ICO projects are scams, and ICO participants do not conduct proper due diligence on their investments. In fact, it’s quite common to find groups of “Dama” (refers to middle-aged Chinese women with strong purchasing power) who rush into different blockchain ICO seminars after grocery shopping. The increasing appetite for ICOs stems from population groups in China called “Dama” and “Grassroot” (refers to people living in bottom class of Chinese society, therefore “grass”) for making blind purchases and investment. Previously, these groups have been responsible for growth of the China gold market, and they are now shifting away from gold and into cryptocurrency markets.

ICOs are gaining attention as more people participate. However, as one peels the onion, the core impact of ICOs is that it challenges the existing social structure. It allows previously poor to taste the feeling of wealth in a rapid manner. Ether and Bitcoin had very large gains that were not realized by the mainstream wealthy in China. This phenomenon has also circumvented capital restrictions that were released earlier this year, resulting in more RMB flowing out beyond government control. Additionally, some people believe that ICOs may eliminate the need for early-stage venture capital firms, many of whom are controlled and funded by the Chinese government. In addition, as many startups embrace ICOs instead of the traditional Venture route, we are seeing failing companies and startups easily raise millions of dollars. There are many problems, and more will arise if there is not proper regulation.

So far, existing crypto exchanges, public sales platforms and equity researchers who cover cryptos would be suspended for a while. Almost all the ICOs are pulled from the shelf at this moment. For those that have solid government background or initiated by state-owned enterprises would keep within our sights and have more room to grow. Yunbi had finished being audited and posted an official announcement on Yunbi.com on September 5th (PT):

“According to the newly released regulation enacted by People's Republic Bank of China and other seven Chinese government regulators, we decide to take following actions concerning ICO risks:

The following cryptocurrency will be took off from Yunbi.com: QTUM, GXS, EOS, ANS, DGD, 1ST, GNT, REP, SNT, OMG, PAY, LUN, VEN

The following cryptocurrency will be resumed trading on Yunbi.com: BTC, ETH, ZEC, SC, BCC, ETC, BTS.”

The financial department of China is currently auditing and examining 60 crypto exchanges and platforms involved with ICOs, and ICOAGE.com has been shut down for 3 days. The examination will take some time.

65 ICOs have launched in China this year, raising total of ~$400M dollars (¥2.6 billion RMB). This accounts for roughly 1/4 of the global ICO market. Further regulation on cryptocurrency trading and ICOs will have a significant impact on demand. The current ban may result in following outcomes:

1. Bitcoin and Ether will be valued more, as fewer ICOs are released in China. More ICO releases dilute Bitcoin and Ethereum value and hurt Bitcoin and Ether owners who are the main players in China. Those players witness Bitcoin and Ether price drop before new tokens trading on exchanges.

2. Many ICOs will be delayed until the government adjusts its stance on ICOs, especially for non-Chinese teams that wish to secure easy money. Several US and European teams postponed their crowdfunding to later this year.

3. ICOs and Crowdfunding in general will require greater KYC/ AML processes.

4. Private sales will become the mainstream process for crowdfunding.

5. Exchanges and blockchain startups initiated by the central government or have strong ties with the government are emerging, and may accelerate faster than people expect.

Some ICOs initiated by government-controlled/holding entities have completed their crowdfunding recently. Those teams never claim they are state-owned or government affiliations, but due diligence can easily reveal the connection.

Rules never change. Things that cannot be controlled by government will first be banned, brought under control, and then made legal. However, Bitcoin and other cryptos are similar to the prior Gold and private equity bans encountered in Chinese history. Now, the gold and private equity user base and trading volumes are large. ICO bans may follow a similar path. It's not the first time the legality of cryptocurrency is questioned in China, and each ban has only made cryptos stronger.

What is more interesting is that on Sept 4th, www.gov.cn/xinwen released recent updates about blockchain technology development in China but the article was removed in the next day. The article first indicated a favorable attitude about blockchain technology, and a number of projects were mentioned, including Antshare (NEO)'s recent usage by charity and several updates about government blockchain research labs such as Jiangsu blockchain research lab, Shanghai Fintech center, Guiyang Blockchain Research Lab and several in Shenzhen.

Further, a number of government supported blockchain research labs are undergoing and mainly focus on building a presence in first tier cities: Beijing, Shanghai, Shenzhen and Hangzhou. A list of government supported blockchain related research labs include (not a complete list):

Central Bank Digital Currency Institute

Zhongguancun Blockchain Research Lab

Jiangsu Blockchain Research Institution

Guiyang Blockchain Research Lab

Shenzhen Institutes of Advanced Technology and Zhaolian Finance

Shanghai Municipal Development and Reform Researches Institute

Financial Blockchain Shenzhen Consortium

Wanxiang Blockchain Lab

Hangzhou Blockchain Research Lab

From the positive article published on Sept 4th and the ICO ban which was announced on Sept 2nd, these opposite tones show two possible scenarios. One possible explanation is that China recognizes the value of blockchain technology but is reluctant to bear the risk of social instability that may occur if there are losses stemming from ICO related investments A second explanation is that the government hasn’t unified their approach. There will be another embrace of blockchain and cryptos, once the government determines the best way to regulate them.

Lastly, I leave you with the recent graph charting the roller coaster ride of Ethereum as events unfolded during and after the recent announcements regarding banning and “clarifications” on ICOs in China. Enjoy the ride!

Picture from measurable.net































