Noelle Acheson is a 10-year veteran of company analysis, corporate finance and fund management, and a member of CoinDesk's product team.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to our subscribers.
Nine months after issuing warnings to bitcoin exchanges, China's central bank again sent the cryptocurrency markets tumbling last week.
This time, its focus was on initial coin offerings (ICOs). On September 4, the People's Bank of China (PBoC) issued a sharp statement labelling token sales "illegal and disruptive to economic and financial stability." Analysts blamed this blanket ban for the subsequent sharp decline in cryptocurrency markets, which saw almost $35 billion wiped off of total capitalization in just four days (it has since rebounded somewhat).
While drastic, the ban is understandable and reasonable. And, like the market reaction, probably temporary.
China's financial market is huge, sprawling and difficult to control. What's more, the rapid growth of innovation and reach has given rise to bubbles in a wide range of asset classes, some more shadowy than others.
This is potentially a very big problem.
Take trillions of dollars-worth of opaque financial products with little regulation, add a get-rich-quick mentality and you have a simmering cauldron of trouble that could overflow at any time. Given the importance the party places on social stability, especially in the run-up to the 19th National Congress, it becomes increasingly obvious that the regulators were going to step in.
Although the Chinese ICO market is relatively small compared to the overall economy, it had been gathering speed. According to the Beijing Internet Finance Association, in the first seven months of this year, approximately 65 ICOs raised almost $400 million.
And the accelerating fervor – another report claims that the amount raised in July and August alone reached over $750 million – no doubt set alarm bells ringing.
But, an overall ban on ICO activity, isn't that a bit harsh? On the contrary, it could turn out to be the most sensible way to protect investors at this early stage.
While the overall reaction to the U.S. Securities and Exchange Commission's (SEC) warning on ICOs earlier this year was positive (with most welcoming it as a potential hype-deflator), many criticized it for not going far enough. Declaring that tokens "might" be securities seems to have had little effect on the plans of many would-be issuers.
While they may be right, a direct comparison is meaningless – the relative size of those markets means that they can afford to be less risk-averse and more pro-innovation.
Given the potential spread of the Chinese ICO market, a case-by-case evaluation is impractical. Additionally, the severity of the risk is disconcerting – the central bank has alleged that a startling 90 percent of issuances so far this year may have been fraudulent.
China, however, is not averse to innovation, even of the financial kind. While it came late to the securitization party, it has since been making up for lost time. And its payments sector is among the most technologically advanced in the world.
So, the ICO ban is not a statement on either blockchain or innovation. Given the authorities' recognition that they need to continue to modernize the financial system, and the desire to become an increasingly important player in global markets, it is unlikely that the ban will last for long.
The most likely scenario is that the prohibition is akin to hitting the "pause" button. This should give the market time to settle down and the regulators a window in which to get consumer protections in place.
In a country famous for its traffic jams, financial market regulation can be likened to driving a car.
Too much pressure on the accelerator (low interest rates and lax oversight) leads to increasing speed and possibly fatal accidents. Slamming down on the brakes (intervention and blanket bans) gets you nowhere, but can give you time to survey your surroundings and plan evasive measures.
Once they're in place, gradually easing up on the clutch while gently pressing the accelerator should give you – and digital tokens – a sensible and sustainable start.
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