An official notice from the People’s Bank of China (PBoC), China’s central bank and financial regulator popped up on the central bank's website on the 15th of September. The announcement was backed by China Securities Regulatory Commission, China Banking Regulatory Commission, China Insurance Regulatory Commission and the Ministry of Industry and Commerce and required that all virtual currency exchanges immediately put an end to their operations.
Earlier in September, the Chinese government issued a ban on all ICO operations stating that it "seriously disrupted the economic and financial order." The committee led by China’s central bank had prepared a list of 60 exchanges that were to be subject to inspection, and in the duration of that process, all ICO funding was to be frozen.
This was a drastic move, since the Chinese ICO market, even though relatively small in comparison to the overall economy, was picking up speed. To be more precise, almost $400 million were raised by ICOs in the first half of this year – with some reports claiming that number was more like $750 million.
What triggered this reaction?
The primary incentive for the Chinese government’s guns blazing approach was rather surprising. According to some Chinese state-owned news outlets, this was a "consumer protection" action. Pan Gongsheng, a vice governor at the People’s Bank of China, gave his opinion on the situation at the annual financial book award ceremony organized by China Business News and JPMorgan Chase & Co: "If we didn’t shut Bitcoin exchanges and crack down on initial coin offerings (ICOs) a few months ago, and if more than 80 percent of the world’s Bitcoin transactions and financing activities were still taking place China, which was the case back in January, what would it be like today?”
Chinese regulators' suspicion is that the majority of ICOs are scams, Ponzi and pyramid schemes, or as they call it "air coins", meaning that the coins are not backed up by anything. Several state-owned Chinese media reported that the craze for ICOs is out of control, citing middle-income older women, in particular, were being fooled into investing their life savings. No one really knows how big this community is, but the sums invested in ICOs are certainly not negligible.
So, What Happens Now?
Nothing. Just because the Chinese government issued a ban on ICOs and cryptocurrency exchanges within its borders, it does not mean that it can control what happens after. Cryptocurrency trading and investing in China got harder, but not impossible. None of the exchanges actually ceased business; they simply moved their servers abroad. In fact, from a regulatory perspective, the ban just made things worse. The cryptocurrency world is decentralized which means that whoever wants to trade cryptocurrency will find a way around the Chinese ban. Moreover, this is already happening as the majority of trades are currently being processed through over-the-counter markets such as LocalBitcoins. The investors and traders simply moved their operation offshore or underground with incognito meetups in person.
It remains unclear how this ban is beneficial to the Chinese authorities since having autonomous platforms pop up as a way to adapt to this change is hardly their desired outcome or even an improvement of the current situation. The cryptocurrency market remains active in China, and it’s up to the authorities to come up with an effective solution that actually serves both sides.