Recent moves by China have lead to a drop in cryptocurrency prices. A committee set up by the Chinese Central Bank has placed an immediate ban on Initial Coin Offerings (ICOs). Several governments around the world have also made similar moves. Kim Jung Un the head of South Korea’s Financial Services Commission, has stated that cryptocurrencies can not be considered money, or financial products.
The policy has led to a massive drop in both bitcoin and ethereum prices. From a high of almost $5000 on the 2nd of September, Bitcoin has dropped to $4300. Ethereum, which is the platform used by most of the ICOs, have now been banned, leading to a drop from a high of $384 on the 2nd of September to $292.65 at the time of writing this article on Monday. Neo, a crptocurrency with a strong Chinese backing has lost over 30% in value since the news broke.
What led China and other governments to ban ICOs
ICO stands for Initial Coin Offer. Under an ICO, investors raise money for a project by issuing a coin or token. Participating in an ICO does not grant one ownership of the project, as most of the tokens are held by the founding team. Investors have poured money into ICOs due to the large profits made when the new tokens or coins start trading. Several of these ICOs, are virtually ponzi schemes because they are based on non existing projects or concepts that are yet to be proven.
Some ICOs are also still at an experimental stage and have poor security. One of the most popular examples of an ICO that failed was the DAO. $150 million was raised, of which several millions were stolen by hackers. Enigma, an ICO billed to open this month was hacked in August by criminals who took over all official channels and launched a pre sale. Over $500,000 worth of ethereum was stolen.
ICOs are largely unregulated by authorities who are not quite sure how to classify them. The lack of regulation, has led to a rush by several companies to raise capital, since there are no checks and balances. Despite this, billions of dollars have been raised through ICOs, so far this year. The Chinese authorities may have decided to ban ICOs to prevent investors from getting swindled, which could have a negative effect on the economy.
Winners and Losers
Chinese citizens will lose out both from access to participation in ICOs and raising capital for their projects. Citizens from other parts of the world, would have a greater opportunity to participate in ICOs, which they can then sell at a profit to the Chinese once the coins are listed. Investors that been on the sidelines waiting for a drop in prices to buy, also benefit as virtually every cryptocurrency has dropped in prices.