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Opinion: China Was Right to Ban ICOs

By Sheng Songcheng

Editor’s note: On Sept. 29, South Korea became the latest country to ban initial coin offerings (ICOs), a fundraising method for companies that offers subscribers digital currency, or “tokens,” instead of stock. China had declared ICOs illegal on Sept. 4, and the U.K. issued a warning against ICO use on Sept. 12. People’s Bank of China Counselor Sheng Songcheng explains why he fully supports China’s stance.

I fully agree with the move to ban ICOs in China, and the calls for refunds to be made to investors. In my opinion, these actions are largely aimed at averting risk and protecting investors’ interests while also being an opportunity to further regulate trading of virtual currencies. Still, it is important for China to continue to encourage the current development direction of blockchain technology. I have three reasons for saying this:

First, issuing ICO refunds is a fair solution. ICOs are a new method of financing in which virtual currencies are raised to fund projects. In some ways, they are similar to initial public offerings. But essentially what ICOs offer are not stocks but digital currencies that are generally referred to as “tokens.” Active demand for tokens will push up their prices. Their holders thus earn profits gained from the price increases. This kind of token-trading bears a resemblance to the primary and secondary security markets and sets up a bridge for mutual conversion between tokens and money. Because these tokens are tradable and similar to securities, we need to have regulations in place.

Numerous fraudulent schemes have sought legitimacy under the guise of being ICO projects. This also partly explains the recent clampdown by China’s central bank and six state ministries and commissions, which, on Sept. 4, issued “The Notice on Prevention of Risks Associated with Initial Coin Offering.” Statistics show that 90% of ICO projects have challenges with execution. They will possibly end up disappearing eventually and descend to the worthless level of “air tokens.” There are also a lot of pyramid-scheme tokens, and a great number of projects are outright fraudulent ones that have severely disrupted the development of the blockchain industry. There is great risk involved for not only investors, but also for legitimate blockchain startup teams, which have had to watch as bad money drives out good.

Against this backdrop, it comes as no surprise that regulators are paying close attention to the rapid growth of ICOs. Mainly focused on protecting investors, the first step is ensuring that everyone receives a refund; the next is ensuring that everyone plays by the new rules of the game, which should quickly improve the current chaotic situation. This is very important.

Second, bitcoin trading should be regularized. While technological advancements have helped the development of human society and facilitated systemic reforms, technology can never replace a country’s economic policies. As I said in two articles published in early 2014, when there was a lot of hype around bitcoin, virtual currency is not real currency (legal tender). It is obvious that people don’t have a clear understanding of the difference between virtual currencies and those issued by the state. Let me be clear: No virtual currency is able to replace that issued by any central bank. Monetary policy is one of the major tools a modern nation can use to regulate and control its economy, so central banks must have sole ownership of the right to issue currency.

In the future, even after digital currencies are issued or we have a “cashless society,” central banks will continue to play the leading role. Any other approach would disrupt monetary policy and undermine the entire economy, since it is closely associated with issues such as the usage of money, interest rate regulation and currency circulation. This is applicable to any country in the world. In a couple of countries that have already reached the cashless state, their central banks are still playing the driving role. And these countries all have small populations, high human quality and a high gross domestic product (GDP).

However, as the most important and well-known use of blockchain technology, bitcoin is a globalized asset, and so it is hard to ban it completely. First, bitcoin has been universally accepted; second, it can be openly traded or used in underground transactions; third, it is the carrier of blockchain technology. People purchase bitcoin because of the technology behind it, and its price has surged dramatically in the past couple of years. But the trading of bitcoin — and all virtual currencies like it — needs to be regularized. They can be anonymously transferred from one point to the other, and this poses a huge challenge to China’s capital account management as well as its efforts to combat money laundering. Supervisors and regulators should exert stricter supervision of the people who use virtual currencies to engage in illegal activities.

Third, blockchain technology should be encouraged. Although ICOs are banned and regulations need to be put in place for virtual currency trading, blockchain technology itself is worthy of encouragement. It has already been widely recognized as a highly significant and revolutionary development in the financial world. It is even predicted that by 2027, about 10% of the global GDP will be stored on blockchain. The perpetual decentralization of economic and societal operations via this type of “distributed ledger technology” may help reach the goal of cost reduction and enhanced efficiency.

So far, blockchain technology has been applied to various areas, including e-commerce, etc. Many applications created in China had never before been done anywhere else in the world. With wide internet coverage, a huge population and, most importantly, high acceptance of mobile finance, China may take a leading position in blockchain innovation — just as it did in internet application. From 2008 to 2017, China applied for 550 patents in the areas of blockchain innovation, ranking first in the world and surpassing the U.S., which is second with 284 applications. Apart from numerous startup teams, large-scale conglomerates, including Alibaba, Tencent, Baidu, Ping An and Wanxiang, are also active participants. Numerous blockchain alliances are constantly emerging.

Overall, blockchain technology has been developing rapidly in China, and chaos is inevitable. The timely intervention by supervisors and regulators is a good thing for the blockchain industry. With the ICO chaos being cleaned up, the blockchain community will itself attach more importance to identifying solutions to existing problem and technology, and the blockchain industry will see more prudent development.

Sheng Songcheng is counselor to the People’s Bank of China, an adjunct professor of economics and finance at the China Europe International Business School (CEIBS), and the executive deputy director of the CEIBS Lujiazui Institute of International Finance. This column represents his personal views.

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