Last Monday, China officially declared ICOs illegal as a fundraising mechanism and instructed all digital token fundraising campaigns to “cease immediately.” This action came in the aftermath of the warning issued by the US Securities and Exchange Commission that it might treat digital coins as securities, thus subjecting them to regulation under appropriate trading laws.
Seven financial regulators issued a joint decree characterizing ICOs as “an unauthorized and illegal public financing activity, which involves financial crimes such as the illegal distribution of financial tokens, the illegal issuance of securities and illegal fundraising, financial fraud and pyramid scheme.” The list of participants includes the People’s Bank of China, the China Banking Regulatory Commission, the Ministry of Industry and Information Technology, and others.
Reasons Behind The Ban
Last year, China represented around 80% of the cryptocurrency market. This year, ICOs collected more than 400 million dollars (2.62 million Yuan) in China alone and around 1 billion worldwide. Chinese authorities must have known that their actions would severely compromise the price of Bitcoin, Ethereum, and other coins, but especially NEO, sometimes referenced as the “Ethereum of China.”
So, why did they ban ICOs? Here’s a list of potential reasons behind this decision:
- ICOs have gotten out of hand – The cryptocurrency fever threatens to reach a volume that will be very difficult to control and put in check. With celebrities like Paris Hilton, John McAfee, Kim Dotcom, and Floyd Mayweather jumping on the crypto wagon, the sector would simply continue its growth without any counterbalance to stop it. China probably decided to address the funding mechanism before the ecosystem spirals out of control.
- Proprietary coin aspirations – These are just rumors, but China might want to create its own cryptocurrency. This ban might just be a tool to pave the way for that to happen.
- A large number of scams – It’s a well-known fact that many ICOs are just pyramid schemes or pump and dump scam. China might have some benevolent intentions of protecting its citizens from scammers, but it’s definitely not the sole reason behind this decision.
- A danger to retail investors – China might be looking further into the future trying to protect consumers in case the crypto bubble eventually bursts.
- The very nature of ICOs – ICOs are built around the idea of going around traditional big players, circumventing regulatory obstacles, and providing a new path toward venture capital. You see how the idea of operating without government supervision might clash with the Chinese authorities.
We remember when everybody thought that Bitcoin didn’t have a lot of potential since the Chinese market wouldn’t accept it (this was before Ethereum even existed). Fast forward a couple of years and China is the epicenter of the cryptocurrency industry and considered extremely friendly toward related technologies.
That’s why we perceive this ban as a simple “break,” giving the Chinese authorities some time to put things under control (totalitarian regimes tend to do that). We are sure that ICOs will be allowed to come back on the Chinese market, but slowly and probably favoring the elite players at the expense of smaller ICO campaigns.
China is a business-oriented country and its major players view cryptocurrency as a business sector they want to control and exploit, so we can probably expect a reasonably quick return of ICOs on the Chinese market.