13th September, 2017
On September 4, the People’s Bank of China (PBoC), China’s Central Bank, issued a statement in which it labelled token sales, via Initial Coin Offerings (ICOs), as “illegal and disruptive to economic and financial stability”.
This blanket ban has been blamed by analysts for the sharp decline in cryptocurrency markets which wiped almost $35 billion off their total capitalisation in just four days.
This is not the first time that the Chinese government has reacted strongly to cryptocurrencies. In January this year, they issued public statements that “Bitcoin is not a currency” and urging Bitcoin exchanges to comply with “relevant laws and regulations”.
While there has been a rebound post the crash on September 4, it remains largely attributed to the Chinese government’s drastic response to the proposed ICOs.
Raj Chowdhury, MD of Hashcash Consultants and prominent Blockchain Expert points out that: “ICOs provide a novel, transparent and democratic mechanism to Startups and Firms to raise capital. It helps them circumvent the glass ceiling that startups typically have to break to raise serious money from the market. That being said, they still have a long way to go before they can gain the credibility of IPOs.”
The still-tenuous credibility of ICOs in the market is probably why the risk-averse Chinese Government took this step of a blanket ban on ICOs. While the Chinese ICO market is relatively small compared to the overall Chinese economy, interest has been accelerating very quickly. Prior to the ban, China accounted for 60 percent of all investors in the ICO space.
The US Securities and Exchange Commission, too, in a new attempt to scrutinise the cryptocurrency space, issued a warning last month on the risk of potential ICO scams by public companies. This week, the Securities Commission of Malaysia too warned investors against ICOs, as the potential for investors not recouping any returns on their investments is relatively high.
So are ICO investments really such a risk to the investor?
“The technology itself is capable to legally and technically bind promoters to their cause and from misusing funds,” says Chowdhury reassuringly. “However, there needs to be greater consumer education, legal frameworks and probably a crowd-sourced rating mechanism to ensure no fraudulent activities are carried out using them.”