Are the Regulations on Initial Coin Offerings a Tide Change Towards Cryptocurrencies?
No sooner had China put a ban on ICOs, Initial Coin Offerings, than the following week the FCA issued a statement on their website about how to use them. Should UK companies who use this fundraising system be worried?
Connectivity to crypto interrupted by traditional financial authority bulwarks.
Initial Coin Offerings are a means for cryptocurrency companies and Blockchain industries to crowdfund. ICOs release crypto tokens, which are commonly exchanged for Bitcoin, Ether, other crypto currencies and even fiat money as well. The end result sees the company receiving their capital and the participants their crypto token shares, which they can spend or invest how they see fit.
Trippki is one such company that raises its funds through an ICO to build a peer-to-peer system. Based in London they work with crypto token currencies, called Trip tokens, for the hotel industry across the globe. Bill Purves the Chief Financial Officer does not seem to be too concerned about any changes to the system of how ICOs might be affected, citing good business practices as the only way to deal with any and all changes to a company. “I’m not overly concerned about it, I think though that it could make ICOs more expensive because you will have to regulate guidelines and it may narrow the field of participants that you can reach out to which is unfortunate. They [FCA] almost need to do that to cover themselves and I think it’s two fold, one is that you have to give guidance to participants and two to make sure to let ICO teams know that they are taking potential regulation into account and that they are doing things properly.”
ICOs are a fairly recent initiative started by Mastercoin in 2013 when they sold $5 million dollars worth of bitcoin with their own tokens. Other examples include Ethereum in 2014 that raised $18 million and Waves in 2016 that raised $16 million. This year the interest and use of them has peaked massively with the first half of 2017 seeing $1.27 billion raised globally.
Regular and cryptocurrency media were ablaze with stories about China’s freeze on ICOs as well as the FCA statement. The Chinese government made the decision to ban the practice of ICOs on 4 September. The People’s Bank of China (PBoC) stated that there would be an immediate ban on ICO funding with a tersely worded statement:
“Starting from the date of this announcement, all kinds of fundraising activities through token issuance should stop immediately. Organisations and individuals who have completed token fundraising previously shall make arrangements such as refunding crypto assets to investors to protect investor rights, and to deal with the risks properly. Relevant law enforcements will investigate and severely punish those who refuse to halt fundraising activities through token issuance and those whose completed token fundraising activities are found to have violated the law or regulation.”
The PBoC committee prepared a list of 60 exchanges that would be subject to inspection. Two of China’s largest platforms for buying into ICOs, ICOage and ICO.info, have suspended their services both citing a voluntary decision. China is the nucleus for cryptocurrency initiatives in the first seven months of this year approximately 65 ICOs, with more than 100,000 investors, raised almost $400 million in the country.
The Chinese style of dealing with new and unfamiliar business initiatives seems to follow talking about banning first. Such as the comments in 2015 about Uber, the car hailing service, made by the head of Beijing’s transport committee where he stated that “Private car operators’ business models are illegal” and yet Uber still remained operational throughout the city and the rest of the country. There could however be another reason as to China’s ban, perhaps the state just doesn’t like competition? In June it was reported that the PBoC is testing its own crypto currency, with reports also stating that tests of the prototype digital currency made mock transactions to the country’s commercial banks. There has however been no official statement from the bank itself regarding this.
After researching FCA’s stance on ICOs, I requested a statement from them and they directed me to a warning statement on their website, which was issued at 10 am the same day of my request. The so-called warning, however, seemed more like friendly guidelines: “Most ICOs are not regulated by the FCA …You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.” As well as the fact that, “if you suspect that an ICO is a scam,” you should report it to them.
However, one should never take anything too lightly especially when, as mentioned, regular and crypto media were covering these stories so closely. Unfortunately the experts in crypto knowledge Smith and Crown were unavailable for comment on the issue of the effects of China’s decision and the FCA warning. But the knock on effect of China’s ban saw similar reactions like the FCA in the UK as well as the financial authorities in Malaysia. Most of the statements on ICOs by financial institutions globally were prior to when China banned theirs. For example financial authorities in Brazil and the SEC in the US issued their warnings in July; Singapore, Canada and Israel in August; South Korea one day before China; Russia the same day as China; and Hong Kong the day after.
Other individuals could be seen as jumping on the bandwagon following China’s fateful decision. Take Jamie Dimon chief executive of JP Morgan, who in 2013 made a record settlement with the Department of Justice after being involved in a trading scandal which saw the world’s largest bank at the time forced to pay $920 million in fines one of the biggest penalties levied by a financial institution, who spoke out against Bitcoin the week after China’s decision. At the financial conference where the statement was made, Dimon purported that Bitcoin is a limited market and that the only good argument that he had heard for using it was, “…if you were in Venezuela or Ecuador or North Korea…or if you were a drug dealer, a murderer.”
Even more ironic regarding JPM’s trading scandal and pay out with Dimon at the helm and his comparison the crypto currency being so unsavoury, is the fact that JPM, as well as the other big financial businesses such Morgan Stanley, Goldman Sachs Group Inc and Credit Suisse Group AG, have acted as brokers buying and selling XBT on Nasdaq’s Stockholm-based exchange. The interest by these big institutions in crypto might even have influenced Dimon’s own daughter who he even admitted, mockingly, had bought bitcoin.
If China is going to backtrack and the FCA is just issuing statements to be careful, and Dimon is stating one thing while JPM does another then perhaps one should think as Purves of Trippki does and be “…not overly concerned about it” and just use good business practices. Besides as the saying goes take care of the pennies and the pounds will take care of themselves. However the problem that arises is the more popular cryptocurrencies become the more the traditional money systems are going to feel that they are losing control. So perhaps these symptoms are just the first taste of a more severe world wide clamp down on ICOs with the excuse that the market needs to be regulated against scams and for you the investor’s own protection?
