China’s choice to halt fund raising through initial coin offerings keeps on bothering markets, yet the regulatory decision may not be as questionable as the reaction from the bitcoin group is making it look like.

The People’s Bank of China reported that it was putting a stop on raising money through ICO’s on Chinese trades. (Here is the first declaration, for Mandarin speakers.)

AngelList co-founder Naval Ravikant called the policy a “huge gift to Silicon Valley and its resident financiers.” Further VC Fred Wilson said “We needed a cooling off period and if China’s actions are that cooling off period, then I welcome them. However, a blanket ban on ICOs seems like bad policy to me.” He compared China’s approach to that of SEC in US.

The news is eventually, similar to all things blockchain, theoretical. ICO trading has been frozen on exchanges, and complying with government demands exchanges are offering refunds. The PBOC is thinking on freezing bank accounts related to ICOs. Local regulators have a list of 60 major platforms they plan to investigate.

A Chinese official has clarified the position saying that

 “China will look to resume ICOs in the future after establishing licensing regulations”.

So the net status of the ban is:

  • Nobody is certain exactly what it means or how will it be implemented;
  • Platforms and financial investors look by and large anxious to comply, despite the short-term inconvenience; and,
  • It might be a brief stopgap measure while the authorities decide how to manage digital forms of money.

This is creating a lot of uncertainty but because the Chinese government is known for its far reaching measures this may be one of them.

Why has China has taken such harsh decisions, decisions that are not looking right to financialists of other countries?
Well these may be the reasons:

Ever growing Financial sector:

  • In the period following Chairman Mao Zedong’s death, leading the way to 1989, China experienced probably the most important regulatory changes of the previous century. The nation implemented its Open Door Policy in 1979, opening China up to foreign businesses.
  • China’s private sector grew hugely along with east Asia’s “tiger economies” in the 1990’s, with more reforms in 1998 reinforcing private property rights, closing down government monopolies, and stimulating rivalry in the worldwide private sector. In maybe the most essential advancement in its public markets reform, the government greenlit the Shanghai Stock Exchange, which opened up in 1990.
  • Amid this development stage, millions were pulled out of rural poverty, and GDP per capita developed by right around 20x. This surprising rise in the wealth and purchasing power of Chinese citizens made a working class of financial specialists overnight. This middle class, is an eager source of global consumption and investment in financial products, for example, stocks, bonds, alternative finance and now Bitcoin.

The dual objectives of any securities regulatory authority are to

  1. protect the interest of the investors first and
  2. encourage innovation, second.

Once in a while these objectives are in accordance with each other, but mostly they conflict.
Blanket bans like the PBOC’s on ICOs look fairly more sensible as a measure to stay away from fraud and loss.

A recent past for financial technology

China’s growth in the last 7 years has given a lot of boom to financial industry but has also created an environment for frauds and scams.

In 2015, powered by government media outlets, china pop invested hugely in stock market and indebted themselves. “Tech” organizations inflated their share by 10% just by changing their name. This all crashed in June 2015 wiping out one third of the market and bankrupting many investors.

In the peer to peer space, the PBOC had the same response to its current ICO ban, imposing strict limits on online exchange industry to curb the risks of “shadow banking”. But these restrictions came late as most of the investors had already faced huge losses.

By temporarily restricting ICOs, PBOc is trying to be a bit cautious this time.

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