Counsel & Program Manager
This morning, many in the U.S. woke up to the news that China has ordered a halt on all ICO financing, effective immediately. Moreover, token issuers who have completed ICOs are required to provide refunds to token buyers. Trading platforms have been restricted from providing price information and conducting any exchange between fiat and virtual currencies/
The statement explains that “people who refuse to cease ICO activities or refuse to refund investors will be investigated and severely punished according to the law.” Concurrently, China’s Remediation Office of Risks in Internet Finance has ordered that all ICOs in the country be investigated by local regulatory authorities.
The effect of this statement has lead to sharp plunges in crypto prices. But what does this ICO “ban” in China mean for the global crypto market in the short and long term?
Here are some of my off-the-cuff thoughts.
The background is that there has been a torrent of new ICOs in the Chinese market, collectively raising over 3 billion CNY (~$460 mil) from Chinese residents in the year to date. Some of them of were of dubious quality and could have potentially been fraudulent Ponzi schemes. Prior to the statement, there were several upcoming ICOs in the pipeline.
Despite the context, this ruling is a little surprising. There was news last week that industry leaders and authorities were working to create a ICO best practices framework. Instead of a framework on how to create a compliant ICO, we got a ban. It’s very likely that China wanted to act swiftly to prevent the advancement of further scams, and is instituting a blanket ban as a temporary measure as they figure out more fine-tuned details.
This statement sends a strong signal to the industry that fraudulent ICOs will not find a happy ending in China — they will be forced to refund contributions and many may be prosecuted and punished.
Questions for Consideration
Short Term Ramifications
Long Term Ramifications
China will likely reinstate token sales, but will require licenses and/or approval processes for all organizations. Tokens will no longer be used as a technical layer that can enable regulatory arbitrage; an organization will likely have to abide by traditional regulations for the substantive use of the tokens.
It’s also possible that China will install a regulatory sandbox regime. In a regulatory sandbox, organizations under a certain size/transaction volume would join a government-sponsored program where they are monitored and guided (similar to the fintech sandboxes launched by the U.K. FCA and Singapore MAS).
Despite all the complaints that the crypto community has about U.S. regulators, it is unlikely that the SEC/CFTC/CFPB/FinCEN would outright ban an industry without opportunity for comment and a warning. The approach of US. regulators is to instate heavy regulatory burdens so less legitimate organizations are filtered out.
Overall, China’s statement on ICOs was a strong, decisive move towards greater consumer protection, greater monetary control, and more effective anti-money-laundering processes. The hope is that China will continue to investigate this issue and carve out a roadmap for legitimate blockchain and DLT innovations to thrive in the country.