Nearly a billion dollars have been reportedly returned to Chinese investors that put money to work in some 40-plus initial coin offerings (ICO) that took place on the mainland this year. Though a better word for "returned" may be '"redirected." China's central bank banned ICOs on Sept. 4 and later banned all bitcoin exchanges from operating in the country. An ICO is a crypto-currency funding mechanism for start-ups.
A bitcoin vendor in Hong Kong. The autonomous region and former British colony still allows for bitcoin and will likely gobble up the new ICO projects that were bubbling up on the mainland following a Sept 4 ban by authorities in Beijing.
Xinhua news reported on Sept. 22 that 90% of the money had been returned to investors. They did not say how much had been returned. But between January and August, over $1.1 billion had been raised in more than 65 ICOs, according to government figures.
"To understand what’s going on with ICOs and China you need to understand that fundamentally are two kinds of Chinese," says Anton Dzyatkovsky, CEO of MicroMoney, a global fintech blockchain company and lending services provider based in Singapore. He was speaking fresh off the Global Blockchain Summit in Wanxiang, where many bright-eyed Chinese are looking forward to a digital economy.
One of the reasons regulators put the lid on ICOs was because of the Chinese penchant for gambling. It's one thing to gamble on regulated securities. Another to lose your shirt on a digital currency backed by nothing but the sellers good word and business plan. Pre-ICO roadshows featuring elaborate standing room-only presentations at 5-star hotels drew a diverse crowd, including grandmothers -- a likely tipping point for the People's Bank of China, Reuters reported.
The crackdown came just weeks before the gathering of the people's congress of the Communist Party, a once-in-five-years event. Beijing has been waging a broader campaign against fraudulent fundraising, speculative investment, and corruption and bitcoin fits neatly in those cross-hairs.
At least for now. China is a huge player in this market, with some of the biggest bitcoin miners located there. By cracking down on the crypto-currency trade and all that orbits the world of bitcoin and ether, China is at risk of losing out on a major new development in financial technology.
Bitcoin exchanges allow for investors to buy and sell crypto-currencies. ICOs allow investors to use crypto currencies to buy so-called tokens in new start-ups. These tokens act like coupons for services provided by the company they belong to.
The Hong Kong Securities and Futures Commission (SFC) released a statement about China's decision, reminding the market that crypto has a green light on the peninsula. “Where the digital tokens involved in an ICO fall under the definition of "securities," dealing in or advising on the digital tokens, or managing or marketing a fund investing in such digital tokens, may constitute a ‘regulated activity',” the statement read. Those wishing to engage in such activity would have to first obtain the requisite license from the SFC.
During the Wanxiang blockchain conference, rumor was that some companies were devising clever ways to get that money back. They had already begun to return the money, and would re-register the deal to Hong Kong and Singapore where crypto currencies are bound to securities law. There, the company founders would collect most of the money back from their investors in Hong Kong or Sing.
Some Chinese players are still holding onto the money.
One is NEO, a Chinese crypto-currency platform similar to Ethereum, which launched its ICO in 2016. They said they are not planning to return any funds unless individual token holders asked for their money back. It is unclear how many have done so at this time.
"China remains open for business, so long as your company is headquartered elsewhere," says Dzyatkovsky, who is trying to bring MicroMoney to China.
On Sept. 15, Chinese government officials informed two prominent exchanges, Huobi and OKCoin, that they would have to stop trading by October 31, 2017.
"Governments fear that tokens offer a backdoor to circumvent their authority on currency control and regulation," says Los Angeles based attorney Katrina Arden for the Blockchain Law Group. "Many of these fears stem from not understanding the nature of the blockchain technology underlying (cyber-currency) infrastructure."