When the world’s leading cryptocurrency, Bitcoin, was conceived it was intended to be a decentralised currency with no point of authority determining its worth. As cryptocurrencies have moved towards the mainstream, that autonomy has been compromised.
In Venezuela, for example, “mining” cryptocurrencies is illegal. Those caught doing so have been charged with crimes as severe as terrorism or possessing contraband. And in China digital currencies are facing ever-tighter regulation – though much of it has been targeted towards the usages of virtual money rather than creating the digital units themselves.
In February this year two of China’s most popular trading sites had their withdrawal services suspended, preventing owners from converting their cryptocurrencies into fiat money. This suspension was lifted in May, following new approvals from the central bank.
Then just this week the People’s Bank of China (PBoC) outlawed another popular use of Bitcoin and its peers: the financing solution known as initial coin offerings (ICOs).
ICOs are described as a cross between crowdfunding and traditional IPOs. Whereas IPOs offer investors shares in a company, ICOs solicit funds in exchange for virtual currency, the value of which is pegged to the value of the company. In many cases that company’s product is a new cryptocurrency.
ICOs were created in 2013, but they have surged in popularity over the last year, particularly for companies using blockchain technology (the tech that underlies products such as Bitcoin). According to a report from CoinDesk, ICOs raised $236 million in funding for the blockchain industry last year, just under half the value that traditional VC funds raised for blockchain investments. But by May this year, ICOs had gained pole position.
According to a report from China’s National Committee of Experts on Internet Financial Security Technology, there were 65 China-based ICOs in the first half of 2017, raising a combined Rmb2.616 billion ($400 million). The report estimates these fundraisings have lured 105,000 investors, although Tencent Finance suggests this is a conservative estimate, citing other information that puts the interest at two million people.
The Chinese have already shown themselves to be keen investors in Bitcoin (see WiC218), but ICOs carry bigger risk, because many of the companies raising funds could be hopeless start-ups.
Some cases, as the PBoC has pointed out, are actually Ponzi schemes and sometimes funds are simply stolen by hackers.
According to Chainalysis, as of August this year $150 million had been siphoned off of Ethereum – a popular platform for ICOs – by cybercriminals: nearly 10% of the total funding raised on the platform during the same period.
Last week the National Internet Finance Association of China argued that the rapid rise of ICOs had “thrown the social economy into disorder and created rather large risks and hidden dangers”, and warned that some ICOs were simply frauds. According to Tencent Finance, top investor Xue Manzi had also spoken out, declaring a big bubble in the ICO market.
Then on Monday, the PBoC popped the bubble by simply outlawing ICOs and directing those who had raised funds through ICOs to return the investment.
The value of Ethereum’s own virtual currency plummeted 16% following the announcement, while Bitcoin also dropped 11.4%.
One chief investment officer at Capricorn Fund Managers told Bloomberg: “This is a positive move… There is tremendous value in the model but we need to see more separation of high quality, ethical offerings versus those seeking to circumvent securities for a quick buck.”
One China-based merchant banker possibly summed up the irrational exuberance best when he told the Financial Times: “The problem here is that people are so extreme. There is no pacing. They want to take 100 steps in one go.”
Loopring, a start-up that intended to build a trading platform for cryptocurrencies, raised $45 million from its recent ICO.
Speaking to the South China Morning Post last week, its founder Daniel Wang Dong had been positive: “Regulators do not want to completely cut off blockchain, which could be China’s next bright spot in financial and technological innovation.” However, late on Monday the newspaper CBN carried a bleaker view, citing an anonymous source: “China’s ban on initial coin offerings is just the start, and the country will roll out more cryptocurrency regulations.”
© ChinTell Ltd. All rights reserved.
Brought to you by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.