Cryptocurrency Chaos as China Cracks Down on Initial Coin Offerings

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Hong Kong advisor Trent Challis from Churchtown Investments comments on the significance of the Chinese policy to ban ICOs.

BItcoin banned in China

China concerned about capital controls?

"Is there an underlying strategic motive for China's move to ban ICOs? Commentators have suggested that the ban represents a play by China to be seen as the prominent rule maker for cryptocurrency, underlining its status as an influencer and power broker." - Trent Challis

The banning of initial coin offerings by China has been one of the biggest developments in cryptocurrency this year, throwing a spanner in the works for many. Start-ups who had intended to raise money through the online scheme have had re-thinks, and other investor u-turns have been mooted.

China has begun a crackdown on the raising of funds through what are termed as digital currencies which are 'token based'. ICOs in particular have been targeted, as a market which has mushroomed in 2017 - making several digital entrepreneurs very rich - now has the potential to see its growth stunted.

So is the cryptocurrency boom essentially a bubble which is about to burst? Only time will tell, but the threat to the market from China seems to come from the Chinese government's perception that cryptocurrencies pose a destabilising risk to the economy and the country's social order as a whole.

The significance of the Chinese policy to ban ICOs - which are the routes with which funds are raised for cryptocurrency ventures (at present entirely unregulated) - cannot be underestimated. China sits at the top of the tree as the biggest cryptocurrency market anywhere in the world. Studies (https://www.coindesk.com/estimating-data-china-real-bitcoin-trading-volumes/) suggest that no less than 80 percent of transactions for Bitcoin are made in China's native currency; yuan.

A statement of intent

Could there be an underlying strategic motive for China's move to ban ICOs? Commentators have suggested that the ban represents a play by China to be seen as the prominent rule maker for cryptocurrency, underlining its status as an influencer and power broker. They have picked up on the growing feeling that cryptocurrencies and the blockchain - which is where transactions that take place in digital currencies are recorded - are going to be central to finance in years to come.

Intervention at this stage suggests that the government in China has fully appreciated the size of investment activity, and plans to curtail the risk of investor losses due to the speculative nature of the investments. In this respect, they are obviously wary of the bubble bursting.

A gateway to the global market?

So why have China and cryptocurrency been such a good match thus far? A large factor could be the tight controls on money both entering and exiting the strictly governed nation. Investors in China have seen this as a way around the constraints which are imposed upon them in yuan, but a knock-on effect could be that the value of the currency has dipped. There is also the opportunity to operate outside the controls of foreign exchange, and transfer funds offshore if needs be.

With this consideration, comes the suggestion that initial coin offerings and cryptocurrencies could be used as a mask for fraudulent activity, which any properly run government would look to crack down on - with money laundering a particular worry.

A political angle?

Look deeper into the political landscape in China, and the looming 19th Party Congress looks to be another factor which the authorities have had their eye on with the ICO ban. Social unrest should be avoided at all costs, and even more pertinently, the 2015 collapse of the stock market cannot be repeated.

Trent Challis, spokesman for a private investment group based in Hong Kong, confirmed his support for the theory that the development is the result of investors wishing to circumnavigate government controls. He said: "My feeling is that China's attempt to stunt ICOs and crypto all comes down to timing. Until they can legislate it, they are keen to impose whatever restrictions they can. Legislating a digital currency will, in itself, be an immense task.

"Since news of the ban broke, I have personally seen the move of many ICOs to Switzerland and other neutral countries. There is no doubt that cryptocurrency has provided a legitimate 'back door' of sorts for big-time investors, some of them multi-millionaires, to transport money out of China, without being subject to capital controls which can significantly disrupt their ability to achieve their objectives.

"So, it looks like China has put the brakes on now to buy themselves time to make up plans to legislate it, if that is at all possible. Our own calculations show that capital to the tune of $395 million USD has been taken out of our investment group, due to the refund of Chinese ICOs. There is no doubt that the Chinese market sat at the top table for ICOs and cryptocurrencies, and by many experts' reckoning, was the biggest market anywhere around the globe."

While financial experts such as Mr Challis are still putting the pieces together, China's precise position on cryptocurrencies remains far from clear. Many regulators in other countries see ICOs as securities, which are therefore subject to being regulated. But with China, the guessing game as to the government's next move continues.

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Trent Challis
Creek Investments
+44 8002229292
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