Signal: China Cracks Down on Cryptocurrency
China banned initial coin offerings (ICOs) and cryptocurrency exchanges in September 2017. The ban has affected and will continue to affect the regulatory landscape of cryptoeconomics as well as the markets in Southeast Asia and globally. This report discusses the ban in general as well as its implications on different regions with a focus on Southeast Asia. The report concludes with some remarks regarding the possible implications that the ban has on Finnish companies
By the 22th of September 90 per cent of the money invested in ICOs during 2017 had reportedly been returned to the investors. According to the Chinese government more than 1.1 billion had been raised in over 65 ICOs between January and August 2017 which indicates that the amount of returned investments is approximately 1 billion. However, according to some, the money was actually not returned but transferred to regions that provide higher investor protection, like Hong Kong and Singapore.
China's ban of ICOs and crytpocurrency exchanges - Why?
The Chinese government stated that the purpose for the crack down on cryptocurrency, or tokens, is its fight against money laundering and fraud. Before the ban ICOs where completely unregulated and some of the ICOs were scams. Bitcoin trading already faced high regulatory oversight before the ban with a focus on the limits set by know your customer (KYC), anti-money laundering (AML) and consumer protection (no margin or zero-fee trading) regulations.
However, industry experts have stated that the ban of ICOs and cryptocurrency exchanges rather stem from a need to protect the Chinese financial markets and some also consider the ban as a strategic move by China. A decentralised cryptoeconomy might be seen as a risk in China and the ban gives the country time to consider whether and how it wishes to regulate cryptocurrency.
It is also noteworthy that the clamp down took place shortly before the 19th national congress of the Communist Party of China (CPC) and it can possibly be seen as an attempt to secure economic and social stability ahead of the nation’s most important political event. The ban of ICOs and cryptocurrency exchanges is also compatible with the CPC’s aim to curb corruption, fraudulent fundraising and speculative investment.
Some experts believe that the ban of ICOs and cryptocurrency trading will fade away once the party congress is over and/or when China has had the opportunity to enforce additional regulation. Other experts, on the other hand, believe that the ban will stay in place and that China will fulfil its plans on issuing its own sovereign digital currency.
China's central bank planning to issue its own cryptocurrency
The Director of the PBoC Digital Currency Research Institute and the Deputy Director of the PBoC’s Science and Technology Division, Yao Qian, stated that the bank is currently researching the possibility of a central bank-issued cryptocurrency.
While speaking in Beijing on the 4th of November 2017 Qian noted that the central bank aims at issuing a digital currency among all other cryptocurrencies with the only difference being that its state-owned. Further, Qian stated that “virtual currency is easier to trace, allowing the central bank to monitor its velocity and the whereabouts of the money and improve its monetary policies accordingly”.
Implications - regulation
No global consensus exist on whether or how cryptocurrencies should be regulated. Sovereign governments feel a need to regulate the cryptoeconomy when a substantial part of consumers in a certain geography get exposed to it. This is, however, challenging due to the decentralised nature of crypto.
Different jurisdictions treat cryptocurrencies variously, with some identifying them as assets, commodities or currencies and some struggling with determining whether all or only some of the tokens are to be considered as securities.
Singapore e.g. treats cryptocurrency as an asset but the Monetary Authority of Singapore (MAS) has stated that “digital tokens through ICOs that are determined to comprise securities will be subject to the regulatory requirements of securities. Further, the authority stated that more targeted legislation is to be considered if needed. MAS gave its statement a few weeks after the bank accounts of a significant amount of companies providing cryptocurrency and payment services had been closed in Singapore due to the uncertainty of the legal status of tokens.
This uncertainty most likely stems from China’s clamp down on cryptocurrencies. It made other nations consider whether they should follow in Chinese footsteps and illegalise ICOs and cryptocurrency trading. So far, South Korea has banned ICOs and the Securities and Futures Commission (SFC) of Hong Kong has stated that some offerings will face regulatory scrutiny. Russia, on the other hand, is also planning to issue its own state-owned cryptocurrency called the CryptoRuble.
Implications - the market
The cryptocurrency ban initially led to a fall in cryptocurrency prices, especially bitcoin and ether, but most of the cryptocurrencies have now recovered. China's ruling has also enabled Japan's bitcoin exchange, bitFlyer, to become the largest in the world by some methods of counting. South Korea has also experienced a sudden growth in bitcoin trading and many blockchain companies that used to operate in China have re-registered their companies in Hong Kong and Singapore.
The decentralised nature of crypto has enabled companies operating with cryptocurrencies to simply move their investments and trading to other countries. The ban has also been circumvented by increasing peer-to-peer investment done in private instead of crowdfunding through ICO platforms. Thus, the effects on the stateless cryptocurrency market have not been that significant and the ban has mainly required businesses to relocate their activities.
Insights for Finland
As stated above, China’s ban has implications for the regulatory landscape of cryptoeconomics as well as the market in both Southeast Asia and the rest of the world. Finnish companies operating with cryptocurrencies should consider regulatory risks in Southeast Asia due to the current uncertainty related to the legislative landscape of cryptocurrencies in the region.