Special Reports provide in-depth analysis and insight into the biggest issues and trends affecting the development of new technologies and, in turn, research, business and policymaking. Content will range from the latest news and features to Q&As and global reactions, as well as include interactive reports and infographics.
This report examines China’s crackdown on cryptocurrencies in September. What started as just rumours, ended with Chinese authorities ordering all Beijing-based cryptocurrency exchanges to cease trading and immediately notify users of their closure. As Vlad Zamfir, a Blockchain Researcher at the Ethereum Foundation told us in an interview, cryptocurrencies are not very compatible with Beijing’s capital controls. That is why the regulators see blockchain as a potential risk and want to regulate it thoroughly. He reckons that China wants its own blockchain with its own rules however, it will be a while before the tech is really able to scale to meet the country’s needs. And for the time, it will most likely be a medium to hard ban on cryptocurrencies.
As of now, Chinese exchanges and wallet services are trying to find new locations for their business: they apply for licenses in Japan, set up over-the-counter shops in Hong Kong, lay the groundwork to operate in Singapore and South Korea, and officially announce their intention to move on and go global. However, back in September, they refused to provide any comments regarding the situation and their possible plans. The majority of blockchain events were cancelled, and local companies and experts refused to give any official statements. The 3rd Global Blockchain Summit organized by Wanxiang Blockchain Labs was the only high-profile conference in the region that was allowed to take place after one change in the programme -- no ICO talks.
Conference organizers kept changing the rules for media and eventually forbade us from taking any photos and videos or recording any interviews. Despite these challenges, Binary District Journal has managed to gather and collate all available information in order to provide insight into the mood, causes and consequences of China’s ban on ICOs and cryptocurrency exchanges.
Reporter: This is Shanghai, the business capital of China. And this is W Shanghai the Bund, a venue for one the most influential and biggest Blockchain events in the world -- the Global Blockchain Summit organized by Wanxiang Blockchain Labs. Working closely with Ethereum and having Vitalik Buterin himself as their Chief Scientist, Wanxiang is the largest Blockchain development backer in China, investing billions of dollars in various Blockchain-related projects. However, despite all their efforts, China has just made a huge move backwards making Blockchain a sensitive issue to even talk about.
Simon Dixon, Co-founder Online Investment Platform BnkToTheFuture: “Today or yesterday was a day that the market had a big reaction to the fact that some of the Chinese exchanges have been shut down. There’s a lot of speculation the week before the Chinese government made some announcements that ICOs are illegal fundraisings. Now within China, there was a huge market of ICOs. Some ICOs reported 40% of their investors were coming from China -- especially in the pre-ICOs. And the market was somewhat getting incredibly heated. In some instances, we found ICOs in China that actually had myself as an advisor even though I had nothing to do with them. And we had ICOs raising finance under other people’s brands. Scams were really getting out of control.”
Xiahong Lin, Founder Bodhi Foundation, CEO Ockchain, Inc: “When people thought it was potentially profitable, it went so crazy. It became irrational. Some were really small projects with a lot of money. It didn’t only increase the capital but made the market too crazy. That’s why China has recently ruled out regulation policies.”
Jonyhyup Kim, Founder ICON, Gail Kang, Marketing, Head of Department: “We know that many people worry about the current situation in China. The regulation seems a bit sudden to many people. However, we think it is a very positive move for the crypto community in China.”
Simon Dixon: “What’s interesting is this whole conference has been about the applications of Blockchain and interesting things that people are looking to do with blockchains, and no talks about ICOs are allowed. People are very scared of even using the word. Some people have said that one person was arrested -- I can't tell whether that’s true or not -- for mentioning an ICO. I just have no idea. I’m just hearing whispers of what people are talking about. The mood is full of fear. I’ve hear that one company have left China. And they are looking at setting up in other jurisdictions to pursue their business interests.”
Feller Sloan Gao, Founder of ATMatrix Community, Chairman of ATMatrix Foundation: “Blockchain technology is positive. It is encouraged in China. It should be implemented to solve problems, provide solutions for industries, for different industries. And we think it is very good and we can get more support. Government is very supportive of this project. They think that it can cut down their costs to support one centralized website to manage all patients data amongst different hospitals. Now we want to set up an open shared AI platform. It will be first deployed in China and later we will take it to the overseas market. In China, we have selected several industries to deploy our platform.”
Reporter: With China’s underdeveloped financial regulation and lack of legitimate investment options, more than 100,000 Chinese investors contributed up to 394 million worth of cryptocurrencies through ICOs in January-June. The boom has fueled a jump in the value of cryptocurrencies but raised fears of a potential bubble. Only 10% of ICOs were actual Blockchain projects, while 90% simply wanted to quickly raise money. One of the reasons regulators stepped in was that the ICO fever extended beyond the traditional crypto community. Now the government requires all funds to be returned to Chinese investors.
Xiahong Lin: “Illegal ICOs are not allowed in China. But it is still hard to define which one is illegal and which one is legal. For me, it’s not good for ICO itself. A lot of US or projects outside of China, they also try to ban the users or IP from China just because of the legal concerns.”
Simon Dixon: “The Chinese law has a law called Fundraising and unlike the US or the rest of the world, where the regulation is mostly focused on the investor, in China it is focused on the entity raising finance so this would be what they deem to be illegal fundraising.”
Xiahong Lin: “We want to stop our ICO plan for now and see what’s going on in the future. We will try our best to compline with the regulation, with the policy and the law as well.”
Jonyhyup Kim, Gail Kang “FSC which is in control of currencies in Korea are going to make some sort of regulation. And they are really worried that there are too many ICOs happening. And they want to prevent scams and fraud related to that. For example, in Japan, they have already started regulation long time ago, and they are in the process of reviewing it and the result is going to come out at the end of this month. China has stopped everything at this point. And Korea is somewhat in the middle. There are a lot of worries and there is a lot of movement to go to the positive side. In between China and Japan, Korea is like a grey area.
For the Blockchain companies in China, they have a strong need to go outside of China and expand their communities outside of China. We believe there is going to be an active movement among China, Japan and Korea. And Korea is in a grey area – many people are very attracted to that part as there is no regulation yet. We also have a strong need to connect with China and Japan and all around the world with Blockchain communities.”
Feller Sloan Gao: “Our community in China is very good -- we have now nearly 10 000 supporters. We worked a lot to establish this community now we want to develop it in Europe, in the UK, Germany, France and also in US, Australia, Russia. We think that our project is global. We connect AI and Blockchain. We are the first ones to do this job in the world.”
Reporter: There is an opinion that cryptocurrency exchanges were instructed to shut down mostly because of their involvement in ICOs. The ban might be temporary, and it shouldn’t take long for a new policy to see the light. China enjoys its ability to set the global price of cryptocurrencies way too much to lose this powerful tool of influence and let the coins flow abroad. However, while the ICO-ban seems to have slowed down a 6-month-long eruption of growth, this does not appear to be the needle that pops the bubble.
Simon Dixon: I think the regulators, the PBOC and the government have made a clear message but what’s really unclear is what they’re gonna do next. It might be the case, as we have seen in the past, that China has to stamp down on something because it gets too heated and it’s turned into a bubble. We are certainly in a bubble with all coins and ICOs. I don’t think that Bitcoin was in that bubble and I think that a lot of people might have been using this as an accumulation phase because Bitcoin didn’t necessarily have any direct ties to ICOs. But what happens next -- are we gonna see progressive regulations? One thing that came out of this conference is that everyone is talking what they wanna do with the Blockchain. The government have given their indications that they wanted to create their own cryptocurrencies in the past using Blockchain. There’s been announcement after announcement of smart cities that want to build upon blockchains. They might have a completely different definition of a Blockchain. T think what they are saying is that Blockchain doesn’t need to have digital asset attached to it and without that digital asset you have a database and database is simply not a blockchain.
Xiahong Lin: This regulation is a big deal. I think yesterday or 2 days ago there were some rumours but now it is a reality, some bitcoin exchanges are shutting down because of the regulations as well. 4 years ago there was a similar regulation and it hurt the whole market. And right now the same thing is happening again. Shutting down is bad news. People have to figure out -- does this market really have a future, is it really a good place to invest, is Bitcoin a future currency or not?
Jonyhyup Kim, Gail Kang: “Ethereum and bitcoin are almost impossible to use KYC program in the system. That’s why a black market is going to be created and is going to be bigger, however, we try to control it but the government who try to control the black market from spreading, they are going to encourage a new Blockchain platform that can use KYC programme in it.”
Xiahong Lin: “The confidence got lost because of bad news happening from day to day. Long-term wise there will be more and more regulations on people, exchanges, investors, and those channels that connect people and currencies. But the whole market will be more and more legit. Long-term wise this is good news. Very positive. In the future when people realize what is the right way to invest in it and what applications to build on top of Blockchain. The whole market will become hot and increase again.”
Jonyhyup Kim, Gail Kang: “Even though all Chinese exchanges are stopped at this point, we believe they are going to reopen or the government is going to create a new exchange that is controlled in a healthy environment. Therefore we just need to wait, sit down and see what happens.”
Simon Dixon: “Hopefully those exchanges will get the opportunity to come back online. Maybe there will be some fines. There were certainly some bad players in this industry with ICOs. It’s all to be seen. But the government have certainly made the message loud and clear and people are reacting; they’re going to decide whether they are leaving the country to pursue their interests or there is going to be some kind of new progressive regulation that allows them to do their business under a more regulated environment but will see where goes next.”
Reporter: The Chinese Communist Party will soon embark on its own “Game of Thrones” as delegates gather for its National Congress in Beijing on October 19. Now is the time when party leaders can’t risk a high-profile fraud case like ICO and have to remove all the dark spots on the Xi-Li administration’s “Chinese Dream” project. On the other hand, it would not be surprising to see the ban slowly, and quietly, get pulled away after mid-October.
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]