Earlier this month, the market of cryptocurrencies trembled in reaction to the news that the Chinese regulatory authorities would be shutting down Bitcoin exchanges as well as investigating initial coin offerings (ICOs) which have recently taken place. Prices plummeted further as the CEO of JP Morgan, Jamie Dimon, branded Bitcoin as a “fraud” and that “someone will get killed”. The bloodbath which ensued saw the total market capitulation of cryptocurrencies tumble from roughly $175 billion to sub-$100 billion levels.
However, the market quickly recovered as the initial fears started being allayed and analysed. Fears of a blanket ban on all cryptocurrency-related activities by the Chinese government will likely not materialise as rumour has it that mining and over-the-counter trading of Bitcoin will still be allowed. Moreover, the list of investigated ICOs which was published shows that the only ICOs under investigation are those which had some form of malpractice to the detriment of the investors.
Even if Bitcoin exchanges were to be outlawed in China, the effect would not be anywhere as drastic as people first feared. The total volume generated by Chinese Bitcoin exchanges is less than 10 per cent at the time of writing, and it is generally believed that such exchanges artificially inflated their trading volumes. Most of these volumes have already moved to other prominent markets such as South Korea and Japan, with the latter becoming the biggest market for traders, thus succeeding China.
Even if the worst-case scenario were to materialise and mining is also outlawed in China, there are various other countries such as Iceland and Hungary which are well-positioned to become the next mining kingdoms due to their low electricity costs. China’s stronghold on the market steadily declined over the past three years, and its absolute dominance has finally come to an end. This should be treated as good news, as it leads to less market manipulation and more room for inclusion from other jurisdictions.
Not all ICOs are equal, and some are more equal than others
As to ICOs, it is beneficial to briefly explain how ICOs work in practice. An ICO is launched by any person or persons wishing to create a platform built on a blockchain, such as the Ethereum blockchain, or even creating a separate blockchain in the process. Cryptographic tokens are issued by the creators for use in such platform; for instance, if a decentralised casino is built, then normally the only accepted currency in such casino would be the cryptographic token issued by the casino creators. These cryptographic tokens are then sold for Bitcoin, Ether, or other cryptocurrencies in the ICO itself.
Through such a process, the creators are funded by the persons buying the cryptographic tokens, while at the same time distributing such cryptographic tokens to be used later on in the underlying platform. This innovative way of raising funds has led to astronomical amounts of money being raised, with the largest ICO raising almost a quarter of a billion US dollars; however, these large sums have also attracted the interest of less than legitimate entities running shady ICOs, with some investors getting bitten.
It is generally agreed that regulation is required and that once that happens, then public trust can finally start building up in earnest, thanks to certain measures which would ensure investor protection.
This would also lead to institutional money from established hedge and pension funds to be allocated towards ICOs, which could potentially lead to the true boom of blockchain-built projects and overlying cryptocurrencies utilised in such blockchain projects. It is worthwhile reminding oneself that the dot-com market peaked at three trillion US dollars before the millennial crash; the current market capitulation of all the cryptocurrencies in circulation is a far cry from that figure, and this only adds to the excitement of the upcoming developments in the sphere.
It is also important to keep in mind that not all ICOs are equal (and that some are more equal than others). IPOs which are disguised as ICOs should not be encouraged, as there are already regulated vehicles to carry out an IPO. ICOs have their own niche and appeal for the market, and they should continue thriving in their own niche without the need to step into the others’ areas. The confusion between ICOs and IPOs also needs to be distilled. The main distinguishing factors are that IPOs grant shares of ownership and voting rights in a company and are generally undertaken towards the mature stage of a company when it is ready to go public, whereas ICOs should not be granting any ownership or voting rights through their tokens thus retaining the company’s status as private, and are used in the start-up stage of a company for funding. If this delineating difference is retained, then ICOs and IPOs can co-exist with nullifying each other’s benefits and effects.
As a premier blockchain solution provider, Intelliblock welcomes any regulation in the sector which would curb fraudulent behaviour without restricting development, albeit being a delicate balancing act. Through its extensive experience and work on ICOs, Intelliblock ensures that any blockchain projects are undertaken with meticulous attention to detail and state-of-the-art functionalities integrated, as well as ensuring that all such projects are in line with any regulatory requirements which might emerge.