Op-Ed: What Does China’s Crypto-Future Look Like Post-ICO Ban?

Executive Brief

The price of Bitcoin has been regaining its footing after China’s clampdown on ICOs and exchanges. This is not the first time China has tried to stifle cryptocurrencies for fear that they can be effective means for citizens to keep their capital safe in unfavorable economic conditions, out of reach of authorities. China may attempt to nationalize the local crypto industry, and could issue digital Chinese Yuan tokens to act as the new reserve currency on newer, more-highly regulated exchanges—platforms where tokens created via state-sanctioned platforms using the new denomination could be traded. The regulations could drive innovation for Chinese fiat gateways running through decentralized exchanges, which may become the only means for investors to swap their tokens. The ruling may also push users into more anonymous cryptocurrencies that do not leave a digital footprint.

Read the full story below. 

The last few days have seen Bitcoin’s price recover by more than one thousand dollars after a tumultuous fortnight that saw its price drop from $4200 down to below $3000. According to Coindesk’s Bitcoin Price Indicator, Bitcoin is back to trading at more than $3900. Most experts point to China’s comprehensive ban on Initial Coin Offerings (ICOs) and the forced closure of  local exchanges as the main reasons for much of  the volatility - though JPMorgan CEO Jamie Dimon’s recent suggestion that  Bitcoin is a “fraud” certainly helped to fuel the prior bearish sentiment.

 

China has a history of interventions in crypto markets

This is not the first time that Chinese authorities have flexed their muscles and sparked market volatility. In late 2013 The People's Bank Of China (PBOC) prohibited financial institutions from handling transactions in the currency, before ordering commercial banks and payment companies to close bitcoin trading accounts in April of 2014. In February of this year, Chinese exchanges halted all withdrawals amid inspections by the PBOC —  who, if leaked documents by 8BTC are to be believed, demanded exchange compliance not just with local law, but also with policies detailing how the businesses are managed and operated.

 

Why has the Chinese government taken action?

China has generally followed an interventionist approach in its economy compared to the western world. The growth of Bitcoin use in China has reinvigorated concern for its ability to circumvent the country’s strict capital controls, where citizens could use cryptocurrencies like Bitcoin to move wealth outside of China to protect against government seizure and frequent devaluations of the Yuan. If the Chinese government rolls back this ban, it will surely come with tighter Know Your Customer and Anti Money Laundering processes. The last thing China wants is their people using cryptocurrencies as credit intermediaries or for capital safety when their Central Bank fuelled liquidity supernova hits a brick wall of unserviceable derivatives.

The rise of the ICO phenomenon as an investment vehicle over the last year has contributed significantly to the demand for intermediary cryptocurrencies like Bitcoin and Ethereum to fund them — resulting in price rises that attract even more people to the market. ICOs have proven innovative for their ability to democratize the investment process by allowing even the poorest a shot at winning the lottery, which will no doubt have drawn the ire of politically-connected Chinese firms with interests in Venture Capital.  

Less cynically, Chinese regulators are concerned that the absence of both investor and project licensing in an environment where proper due diligence is the exception rather than the norm could leave ICO investors vulnerable to fraud. Many ICOs are scams or unverifiable, and many more are unlikely to complete a working product, nor succeed in their market even if they do. In the runaway ICO trend to put anything and everything on a blockchain, failed startups are repackaging their products as “blockchain projects” with “working software” that nobody previously cared for to signal development credibility, then going on to raise large sums of capital.

 

This is not the end of Bitcoin in China

Bitcoin’s legitimacy draws from its popularity and continued usage rather than political decree from state institutions. The short term will see it becoming more difficult for Chinese to trade cryptocurrencies for one another, or into Chinese Yuan (CNY), but the market will respond accordingly and innovate. Decentralized exchanges that allow two people to trade crypto directly without knowing one another's identity will increase in use, and escrow services built into them will enable a banking gateway to trade between Bitcoin and the Chinese Yuan. Investors may also switch their preference to “anonymous” coins that utilize zk-snarks protocols to avoid leaving any digital footprint of the transfers. Regulation can have unintended consequences - as Litecoin creator Charlie Lee said on twitter: “humans always find a way to do what they want”.

 

China may attempt to nationalize crypto industry to merge the benefits of blockchain with an insular economy.

China have a track record of supporting local companies (think Alibaba, Weibo, and Wechat) and outlawing foreign ones (Facebook, Google, Skype, Twitter). The People’s Bank of China has been toying with implementations of its own national cryptocurrency with the nation’s banks according to CCN, and demand from Chinese banks for blockchain experience has been growing rapidly in a bid to revolutionize the local banking system and combat fraud. A Chinese state-backed cryptocurrency could work as a proxy token that allows ICOs to be funded in its denomination and then traded on state-approved platforms and exchanges, and this may not leave “legal” room for a competitor reserve currency like Bitcoin. 

One big question left hanging over the heads of miners is whether the Chinese government will allow them to continue operation. Chinese miners have become the leading manufacturers of Bitcoin, accounting for the vast majority of Bitcoin’s hashrate thanks to an abundance of cheap local electricity. Being able to produce Bitcoin’s cheaper, Chinese Bitcoin sales represent a significant transfer of wealth from the western world to China. Western crypto projects have become wary of centralization to their mining economy, and many have begun re-evaluating their position on Proof-Of-Work mining in favor of Proof-Of-Stake, and other alternatives that don’t leave significant investor wealth at the mercy of foreign governments and miners (think ongoing Bitcoin scaling debate).

If Chinese miners are spared in this round of government interventions, state-sanctioned exchanges will be required to facilitate the sale of Bitcoin to international buyers, or the miners could be encouraged to direct their hashing power to platforms that are working with the Chinese government.

 

Governments worldwide increasingly evaluating ICO market

China is not alone in evaluating ICOs. The USA, Canada, Singapore and Israel have announced that they’re taking a closer look into the sector, while countries like Switzerland, Isle Of Man, and Thailand have already issued statements supporting the potential of ICOs and the need for prudent regulations that protect investors, without stifling innovation. These moves could see growth in the space, and ICO money flowing towards higher quality investments.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Timothy Goggin

Timothy Goggin is an economic analyst with an interest in the application of moral philosophy and decentralized systems. He studied economics at the Business School at Victoria University of Wellington, New Zealand. His area of research is the consequential and moral dimensions of implementing digital currencies and the resulting synergies for consumers in the trading environment.

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