China Daily Global Edition (USA)
Casting a ray of hope on the new found ‘gold’
Cash-starved startups may have landed themselves in a real conundrum after financial watchdogs in Hong Kong and on the Chinese mainland cracked the whip, pulling the plug on initial coin offerings (ICOs) — the novel method for budding enterprises to raise funds through the issuance of token-based digital currencies.
The clampdown came amid growing nervousness over the proliferation of financial malpractices, including fraud and pyramid schemes, and with a potential bubble in the making, following the recent explosion of the increasingly popular application of blockchain technology on a global scale.
Experts, however, are sticking to their guns that the world’s virtual currency trend is unabating and are convinced that the muffling regulations, while being indispensable, are just a stop-gap measure aimed at preserving economic stability and paving the way for healthier growth of the ICO, cryptocurrency and blockchain business.
David Tang, founder of a Hong Kong-based ICO advisory company, as well as a blockchain enthusiast himself, has helped companies with smart contracts to put together ICOs, having come up with more than 10 ICOs so far.
He explains that ICOs, which promise investors high returns using cryptocurrencies rather than stocks, represent a financing channel that issues tokens on blockchain and sell them to investors in exchange for other cryptocurrencies like ethereum or bitcoins.
Faster, cheaper way
It’s thus a faster, cheaper and better way to raise money with low transaction costs and high liquidity. But, the quality of ICOs, pyramid selling of bad ICOs, and ICO’s disruptive impact to traditional market remain key concerns for the moment.
The controversial fundraising scheme through which startups can issue their own virtual currencies in exchange for real money, has been around for several years, but went wild recently. It struck a raw nerve with financial regulators on the mainland and in Hong Kong and South Korea, which mounted a crackdown on the controversial mechanism, sparking a dramatic drop in the prices of virtual currencies.
In a recent report on China’s fintech industry, ICBC International — the financial arm of one of the mainland’s “Big Four” lenders, Industrial and Commercial Bank of China — threw its weight behind the ICO measures, saying they’re a buffer aimed at creating a salubrious environment to ensure the stability of the financial system and the better development of cryptocurrencies.
To date, 65 ICOs have been done on the mainland, helping startups raise almost 2.6 billion yuan ($400 million), according to a report by the mainland’s fintech risk analysis technology platform.
Statistics from the Autonomous Research Institute showed that $1.3 billion in token-based funds had been raised globally by virtual organizations or fundraising entities in the first half of this year, far exceeding the amount put up through traditional venture capital financing.
The China Securities Regulatory Commission banned ICOs as an “illegal way” of fundraising in early September, triggering a 20-percent plunge in the price of bitcoins from $5,000 to $4,000 three days after the ban took effect.
The People’s Bank of China stressed the need to prevent fundraising risks through ICOs, calling such activities “unauthorized and illegal public fundraising”. It warned that they are suspected of being involved in criminal activities, such as the illegal sale of tokens, issuance of securities and fundraising, as
Hong Kong’s Securities and Futures Commission said all parties engaging in a regulated activity targeting the Hong Kong public are required to be licensed by, or registered with the commission, irrespective of where they are located.
Tang said as far as ICOs are concerned, there’s still a long way to go because as long as the SAR government does not legitimize the status of bitcoin or ethereum, no laws or regulations can be imposed regarding ICOs.
But, he said the case is different on the mainland, believing that ICOs will resume there soon, possibly next month, with the new rules intact.
“The new regulations on ICOs hurt us quite badly as 60 percent of our clients and 80 percent of their investors are from the mainland.”
Tang believes the virtual currency ecosystem is an unstoppable trend and cryptocurrencies will only grow in popularity. “In the long run, ICOs can replace IPOs (initial public offerings) and disrupt the traditional capital market.”
Eric Piscini, Deloitte Global Blockchain leader, backed ICOs as a fantastic way to raise funds, saying they have successfully serviced 75 ICO projects worldwide to date.
He believes that future prospects are good. For the time being, it’s too easy for enterprises to raise money, so regulations are definitely needed. He thinks the ICO clampdown on the mainland is temporary and regulators will come up with more detailed regulations on the activity when they’re ready.
According to Piscini, the key factors they take into consideration when dealing with ICOs include corporate structure, the quality of the platform itself, and how a company will use the funds raised. He added that many ICO projects presented to them for consultation were not compliant.
Debut failure
The first global ICO, called Mastercoin, was launched in 2013. It was a digital currency and communications protocol built on the bitcoin blockchain, but it turned out to be a failure. According to experts, the most prominent failure was the DAO which got hacked and caused another ICO company Ethereum to split. Ethereum is a successful ICO project and a decentralized platform that runs smart contracts, including applications that are programmed without any possibility of downtime, censorship, fraud or third-party interference.
Joe Chan, managing partner of MindWorks — a budding venture capital enterprise with offices in Hong Kong and London — said ICOs are the spontaneous result of the development of cryptocurrencies as investors owning large amounts of cryptocurrencies have started to have wealth management demand.
He said he’s not worried that ICOs, as a financing channel, would impact and disrupt the venture capital industry, as it has a mature ecosystem, and people working in venture capital are experienced professional investors. Sept 4
“I feel like being on a roller-coaster ride these days and, finally, it came, or it would be fairer to say, bitcoin investors knew very well that the regulations would come one day,” said 25-year-old investor Fang Yisheng as he reacted calmly to the clampdown on initial coin offerings (ICOs).
The Chinese mainland’s ban on ICOs, announced on Sept 4, heralded the authorities’ desire to put a stopper on the red-hot cryptocurrency market to prevent it from getting out of hand, at least for the time being.
A week later, local media reported that the authorities had informed domestic bitcoin exchanges to stop trading in cryptocurrencies, citing people familiar with the matter.
The move was later confirmed when major trading platforms, including BTC China, Huobi and OKCoin announced on Sept 14 and 16 they would halt yuan-to-bitcoin trading by the end of October. The platforms will also shut down thereafter, potentially sounding the death knell for digital currency investors in China. Sept 11
The stringent measures set off wild swings in bitcoin prices in September, with prices plummeting by more than 30 percent at one stage — from $4,678.5 to $2,989.43 — immediately after BTC China’s announcement. However, prices quickly rebounded by almost the same force two days later, according to data from Coindesk. Bitcoin prices had surged a staggering 600 percent so far this year.
“The shutdown of the Bitcoin exchanges is really beyond my expectations,” said Fang. Despite media reports that the crackdown was fueled by regulators’ concern over capital flight and money laundering, he still believes that digital currency has more benefits than drawbacks.
Fang has been buying bitcoins since 2014 when he was still a university student. Having studied technology involving bitcoins, he believed that he “sees the true value in bitcoins”. With a total investment of more than 100,000 yuan, he has had his portfolio decupled within three years.
He described bitcoin as a “new gold” in the Antarctic Pole. “It’s in the de facto condominium so that
on Sept 4 ordered a ban on Initial Coin Offerings, or ICOs — a nascent form of fundraising in which technology startups issue their own digital coins. everyone has the right to dig it. Like gold, bitcoin is also scarce as supply is very much limited. And, dealing in the digital currency calls for very low cost or none at all, while the transaction protects your identity and money, making it a more competitive medium of exchange over traditional currencies in the world.”
Despite its scarcity, the value of bitcoin is also backed by growing public acceptance with global transactions reaching fever pitch. Companies like WordPress, Microsoft and Intuit have been accepting bitcoins for purchases and subscriptions. Japan’s declaration of crypto services as legal payment methods has further accelerated its use beyond digital to brick-and-mortar retail. Russia has also said it will legalize the use of cryptocurrencies like bitcoin.
In China, government officials have clearly defined bitcoin as an asset rather than a currency, weakening its utility.
Sheng Songcheng, counselor of the People’s Bank of China, told Yicai.com earlier this month the central bank had already concluded that bitcoin does not enjoy the status of a currency in law because it is not issued by the monetary authorities — it also lacks currency nature such as law-enforced-compensation and enforceability.
However, he projected a gleam of hope, suggesting that the mainland monetary authorities should consider issuing a central bank virtual currency that it could regulate and run properly.
Market experts are on the same page. Hong Kong Information Technology Federation President Francis Fong Po-kiu believes that China will set up its own digital currency trading platform with the issuance of a national digital currency in the near future.
“As Russia, Singapore and some other countries are examining the possibility of issuing their own digital currencies, investors could trade country-level digital currencies in the near future,” he said.
In Hong Kong, former financial secretary John Tsang Chun-wah defined bitcoin as “a commodity generated in the cyber world” and is “neither electronic money nor a stored value payment facility”. As it is defined as a virtual commodity rather than a currency, bitcoin is per se not regulated by any of the local financial regulatory bodies, such as the city’s de facto central bank, the Hong Kong Monetary Authority, or the Securities and Futures Commission.
Investors, on their part, are baffled with regard to the true value of bitcoins with the government’s conflicting statements on the status of the digital currency.
JPMorgan Chase & Company Chief Executive Officer Jamie Dimon said the cyrocurrency is a “fraud” and a bubble that “won’t end well”.
“It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed,” he told a banking industry conference organized by Barclays. “Currencies have legal support. It will blow up.”
Fortunately, for Fang, he had cashed out most of his bitcoins before the regulators flexed their muscles.
“I see the latest regulations as a sign that the cryptocurrency market environment is proving itself. I’m not that worried about my bitcoins. I can just withdraw all of them from the exchange.”
After all, it’s a super high-risk investment, he added, it will either earn you unexpected return or it can result in permanent loss.