Real implications of China’s ICO ban?

Ether’s price dropped sharply today, immediately after the Chinese Central Government announced they were banning Initial Coin Offerings(ICOs).

The drop wiped out millions of dollars from Ethereum market cap:

If you are not familiar with ICOs or Ether, you might be wondering why they are related. In fact, many ICOs use Ether as means of transaction: investors buy ether to send to ICO companies in exchange for the coins issued by those companies. They trade the companies’ coins with ether as a currency.

People’s Bank of China (PBOC), China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission, issued a joint statement declaring ICOs as unauthorised and illegal. All parties which have raised money through ICOs are required to return the proceeds.

An expected crackdown 

In fact, a few days before the statement, there were already rumours that the government was coming hard on ICOs. A news report by Caixin last Friday, which was widely shared on social media, basically revealed the government’s intentions.

And today, the rumours have proved to be true.

In fact, the Chinese government has always been very vigilant about any fundraising activities in the country which didn’t go through the authorised means.

Earlier this year, they initiated a crackdown on peer-to-peer (P2P) lending, a $100 billion dollar industry. That came after a few P2P lenders went bust, taking investors’ money with them.

And in the past a few days, there have been a number of high profile criminal cases related to fundraising, many causing controversy and debate among legal experts.

What’s next for Ether?

Is this the beginning of the end for ether? We think the drop is actually fairly moderate compared to some other crypto-currencies which were more exposed to Chinese ICOs.

It is interesting to see whether (and how) the Chinese Government will enforce the requirement for ICO companies to return the money to investors, and whether more transactions of ether will take place because of this.

It is also interesting to see whether regulators in other countries will follow suit. US had announced earlier that ICOs had to adhere to some strict financial regulations that currently apply, short of an outright ban.

Singapore’s Monetary Authority also issued a warning in July that ICOs needed to be subject to the same regulations governing securities.

Just today, South Korea hinted they will tighten the regulations on crypto-currencies, suggesting that ICO fundraising platforms would be ‘published’.

If more crackdown similar to China’s comes about, Ethereum will surely be impacted. However, to write it off completely is probably not realistic – it is just hard to predict the investor sentiments.

Just look at how many times Chinese government tried to rein in the housing bubble.

How about bitcoins

While bitcoins suffered some setback today as well, we believe it is for some general concerns about the future of crypto-currencies rather than a response to China’s ICO ban.

The Chinese has invested heavily in bitcoins in the recent years. Mines in China represent more than half of all bitcoin mining activities, according to some reports. Many speculate that bitcoins are used by the rich to get around the government’s capital control. So it won’t be entirely surprising if the government gets down hard on bitcoins one day.

However, looking at what is going on in the Korean Peninsula (now the Pacific Ocean to the east of Japan as well), you would probably still bet on bitcoins.