Examining the Chinese Crypto Crackdown

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There seems to be a significant increase in the number of countries around the world taking a more definite stance on cryptocurrency regulations. China was one of the first countries to ban ICOs and that move sent shockwaves throughout the entire market. 2017 was an eventful year for cryptocurrencies. The price of Bitcoin almost reached the $20,000 mark despite beginning the year at a trading price of less than $1,000. ICOs dominated the crowdfunding landscape with a number of record-breaking ICO campaigns. However, sandwiched between the meteoric rise of Bitcoin and ICO crowdfunding was the decision by the Chinese government to ban ICOs. Not only were ICOs banned, cryptocurrency exchange platforms were also prohibited.

In the aftermath of the decision, the market was plunged into a brief period of uncertainty. The price of Bitcoin and other Altcoins fell considerably as speculation levels dropped. Perhaps the most profound aspect of the regulation was the prohibition of exchange platforms. Cryptocurrency exchanges are the backbone of the cryptocurrency trading market. That is where the bulk of the speculation and other market activities that influence the price and value of cryptocoins take place. With the ban by the Chinese government, a large population of traders were unable to participate in the market. This affected the price of many cryptocurrencies greatly as trading volumes decreased significantly.

Reasons Behind the Ban

A large part of the world woke up on September 4, 2017 to the news that China has banned ICOs. The main gist of the statement released by Chinese authorities pointed to the fact that the government saw ICOs as illegal fundraising activities. The government likened ICOs to financial fraud, illegal securities issuance, and pyramid schemes. The decision to ban ICOs was one that was taken jointly by a number of Chinese government agencies. The agencies involved in the decision were:

1. The People’s Bank of China (China’s Central Bank)

2. The China Banking Regulatory Commission

3. Central Network Office

4. The State Administration for Industry and Commerce

5. Ministry of Industry and Information Technology

While there were no concrete reasons given for the ban, a closer examination of some parts of the statement as well as the full weight of history of Chinese government policies, a few assumptions can be made. These assumed reasons are as follows.

· Pump and Dump ICO Scams

The unregulated nature of ICOs make it so that all sorts of enterprises can sell tokens to investors regardless of the economic viability of the projects those enterprises plan to undertake. This created an environment where Pump and Dump schemes became the order of the day. A start-up will float an idea that probably has no financial merit to it whatsoever. Investors would be persuaded to put up equity by investing in the ICOs. With the popularity of cryptocurrencies, it seemed everyone was looking for the next Bitcoin. These scam ICOs took advantage of the crypto-mania and got a lot of people hooked. With the massive influx of cash into a start-up, the price of the tokens increases considerably and the “entrepreneurs” cash out. The investors are then left with worthless tokens in the aftermath. This situation became a regular occurrence within the Chinese ICO scene.

· Disruption of the Financial Space

Blockchain technology, in general, is a disruptive technology. It functions primarily by causing a major paradigm shift in whatever business segment it is applied to. ICOs constituted the very same thing albeit in a way that affected a critical sector of the market; fundraising. Many countries adopt strict regulations on corporate fundraising in a bid to curtail financial irregularities and other criminal activities. ICOs circumvented all of these checks and balances by utilizing crowdfunding. With a white paper and social media marketing, a start-up could introduce a token to the market and investors would buy. This was beginning to tip the scales of the business scene in ways that were unprecedented in the history of the country.

· Regaining Control of the Business Scene

China is a country that prides itself on maintaining a firm grip on all aspects of the country’s existence. Everything is tightly controlled and monitored. Without going too much into political debate, ICOs are the complete opposite of the established order. An excerpt from the public statement issued by the People’s Bank of China, ICOs had greatly disrupted the economic and financial order. The inability for the state to control the ICO process is something that wouldn’t have sat well with the government.

Effects of the Ban

Many cryptocurrency exchange platforms moved their business outside the country. Binance which at the time was just a couple of months old had to take creative steps to prevent being affected by the ban. With a large percentage of its customers based in China, it had to compete with other platforms that had a more diverse customer base.

The price of cryptocurrencies dropped significantly. However, this was short-lived as the prices picked up after a few weeks of wobbling. The price of Bitcoin fell by $200 in the immediate aftermath of the announcement. Bitcoin climbed to just under $20,000 in the space of 3 months after the announcement. Ethereum lost a market cap of more than $6 after the announcement. The greater majority of ICOs are built on the Ethereum blockchain so the cryptocurrency was seemingly the hardest hit.

A lot of attention then shifted to Japan which had been creating a favourable environment for cryptocurrencies. The Japanese Financial Services Agency (FSA) began granting operating licenses to a number of crypto exchange platforms. The balance of crypto trade in the Asian theatre began to shift from China to Japan. This has seen an increase in Japan’s stature as far as cryptocurrencies are concerned. Japanese officials have expressed their preference for regulations that enhanced the fidelity of the market rather than stifle its growth.

Observers, monitors, and experts on the outside do not know what is going on behind the scenes in China with respect to cryptocurrencies. It remains to be seen whether the ICO and crypto exchange ban will be a permanent one or whether the government will introduce strict regulations. Only time will tell.

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