September 12, 2017
China’s ICO ban was enacted on September 4, when the central bank declared ICOs an “illegal public finance” mechanism. The ban means that Chinese start-ups will not be able to raise funds through an ICO (Initial Coin Offering), where capital comes in the form of cryptocurrency. It does not mean that cryptocurrency developers and service providers in China will go out of business. Nor is it likely to finish China’s flourishing fintech industry.
Not even a little.
There has been concern that the ICO ban could hurt innovation. Oleg Poskotin of ICO platform Cryptonomos said that it “hinders the opportunity to nurture domestic innovation in China.” But the ICO market continues to expand. Chinese companies are investing heavily in technology-driven financial services. Last year, Shanghai hosted the Global Blockchain Summit. Further, as rival markets like the U.S., India and Russia continue to legitimize cryptocurrencies, China will be loath to fall behind.
On September 10, a researcher at China’s Institute of Finance and Banking stated that the ban is only temporary. As Cointelegraph reports, ICOs are suspended “until local financial regulators introduce necessary regulatory frameworks and policies for both ICO investors and projects.” So ICOs have not been stopped, only paused.
This raises the thorny issue of government regulation. Chinese financial regulators are weighing the possibility of allowing ICOs to raise money within a regulatory framework, such as a licensing program. This has already happened in the US: New York State’s BitLicense program requires companies to obtain a state license. Some blockchain start-ups have left New York as a consequence. Only a small number of very large players, better able to afford licensing, have remained.
History repeats itself.
This is certainly not the first time the Chinese government has banned an emerging technology. In 2013, it banned bitcoin. Twice. However, bitcoin transactions and trading simply went off the grid and continued to hum along. This made them much harder to regulate, prompting China’s ultimate decision to legalize and regulate bitcoin. The same could well happen with the ICO market. ICOs and blockchain start-ups could pack up and take their business to Hong Kong, Singapore and Japan – all of which are friendly towards ICOs. In this event, the only victim of China’s ICO ban will be the Chinese blockchain sector.