CHINA BANS ICOs BUT CRYPTOCURRENCIES SURVIVE THE CRASH

One of biggest markets in crypto, East Asia has been in a state of turmoil. Rumors were flying that China would ban ICOs, ban Bitcoin exchanges, or ban cryptocurrencies altogether. South Korea wasn’t far behind. Let’s separate the facts from the fiction and examine what happened, what may happen, and the ramification of both.

TURMOIL BEGINS: FEAR OF CAPITAL FLIGHT

In January of 2017, the People’s Bank of China met with representatives from China’s biggest exchanges. Representatives from BTCC, OKCoin and Huobi sat with officials and were urged to comply with all relevant federal laws and regulations. The Chinese government had become extremely leery of capital flight, which Bitcoin could make easier than ever. The PBOC did nothing else at the time.

Nine months later, on September 4t,h the Chinese government dubbed ICOs “illegal and disruptive to economic and financial stability.” Bitcoin exchanges were instructed to shut down. China is one of the biggest crypto markets in the world, and hosts many of the largest mining operations due the cheap cost of land and electricity. The Chinese government has historically been unafraid to take drastic action to protect their currency or economy.

NEXT STEP: TAILSPIN

The news sent the crypto markets into a tailspin. Cumulatively, the markets dropped some $35 billion in just a few days. Around the same time, JPMorgan CEO Jamie Dimon prominently bashed Bitcoin, labeling it a scam and invoking the tulip analogy many have drawn. Said Dimon “You just saw in China, governments like to control their money supply.” So what does this mean for China, for Bitcoin, and for investors?

CHINA ICO BAN

ICO mania hasn’t hit China as prominently as other countries, but it was very much growing prior to the ban. Roughly 65 ICOs in China raised anywhere from $400 million to $750 million, depending on which source you read. Purely to protect customers, a ban on ICOs is understandable. ICOs have broken into the mainstream, advertising on popular websites and being touted by celebrities. Tinder, Instagram, and Facebook display ICO ads. Boxer Floyd Mayweather and socialite Paris Hilton have promoted tokens. Many of these coins are promising projects led by hard-working teams. But many are scams, and the vast majority will fail regardless of their intentions.

Most start-ups crash and burn within a year, and cryptocurrencies are extremely similar to start-ups, albeit even riskier. As we’ll touch on, other nations have banned ICOs, and the DAO ruling made it clear the SEC is taking a careful look at them. In the United States, only accredited investors are allowed to invest in certain kinds of start-ups. This protects regular people, by only allowing individuals with a certain amount of assets to invest in risky start-ups. No such protection exists to prevent people from putting their life savings into an ICO. Banning ICOs protects Chinese citizens from losing money in shady projects.

However, there are other motivations and factors. China has shown interest in blockchain technology, with the central bank conducting research. Some have speculated this is a temporary ban, to allow regulators time to assess the fast-moving landscape. The Chinese government is also due for a major leadership transition, which occurs every five years. The PBOC likely wants a stable environment for the time being.

BUT THIS ISN’T THE FINAL ACT

Meanwhile, Chinese exchanges were unofficially informed to shut down operations. Leaked documents revealed instructions for exchanges to halt trading. On schedule, exchanges have closed up shop. Some argue both changes don’t really affect much. Chinese investors could still purchase Bitcoin and invest in ICOs through other platforms. The relatively anonymous nature of cryptocurrencies, coupled with tools like The Onion Router or VPNs, makes it easy to still invest untraceably. Still, many casual investors will halt trading. The PBOC has gone back and forth on Bitcoin in the past, so don’t expect this to be the final act.

SOUTH KOREA BANS ICOs

In late September, South Korea followed their western neighbors by banning ICOs. Said a representative from South Korea’s Financial Services Commission: “Raising funds through ICOs seem to be on the rise globally, and our assessment is that ICOs are increasing in South Korea as well.” The statement also warned of “stern penalties,” for those who issued ICOs. Bitcoin and Ethereum dropped slightly upon the news. Per Forbes, South Korea is the 3rd largest cryptocurrency market in the world. The statement also hinted at increased regulation of cryptocurrencies. South Korea hosts three of the five largest Ethereum exchanges in the world. Ethereum is the preferred method for launching ICOs, and roughly 40% of Ethereum is traded through South Korea. Similar to China, the Korean governments motivations appear to be protecting investors and cracking down on pump-and-dump schemes. There’s no indication South Korea plans to ban exchanges as China has.

THE GOOD NEWS: CRYPTO TOOK A HIT, BUT RECOVERED PRETTY QUICKLY

Hovering around $4300, Bitcoin has yet to recover to its peak of almost $5000. Even during the recent bull run, Ethereum didn’t come close to the $400+ levels it hit earlier in the year. Still, both coins and the rest of the crypto markets have recovered well from the news. China has banned ICOs and closed Bitcoin exchanges, but many believe this is only a temporary step. It’s impossible to predict the actions of the Chinese Government, which is never afraid to take drastic actions, but many experts believe China will eventually re-allow exchanges. Capital flight remains a very real problem for Beijing, so when exchanges may reopen is anyone’s guess. South Korea’s action barely moved the price of Bitcoin, and it’s even less of a concern.

CONCLUSION: CRYPTOCURRENCIES SURVIVE ANOTHER CRASH

While upcoming ICOs were banned in both nations, many would argue this was a good thing. The South Korean government has shown no inclination to crack down on exchanges or coins themselves. The actions of both governments merit future monitoring, but for now, investors can take comfort that cryptocurrencies have survived yet another crash.