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Will China’s ICO Ban Make the Cryptobubble Burst?

 5 min read / 

Cryptocurrencies have been gaining traction as a result of the ever increasing popularity of the instrument. The explosive growth in use of cryptocurrencies, especially Bitcoin and Ethereum, and ICOs has recently lead to very high current and future expected valuations, leading financial markets participants to assume a bubble is forming. The speculative nature of ICOs and crypto trading on the still imperfect infrastructure has also created a thriving environment for cyber crime attacks, robberies, money laundering and other controversial offensive activities.

In light of the growing threats of a financial bubble, China banned ICOs and crypto trading, which naturally resulted in an immediate drop in the values of the 15 largest cryptocurrencies. Nevertheless, despite the volatility, the Chinese ban can be assessed as a positive development in the cryptomarket. Cryptovalues will recover as practitioners digest the information and adjust their long term forecasts, including the new regulatory framework, which will eliminate fraudulent participants and enable stable future development of the market.

China “Pops the Bubble”

The major event that shook markets this week was China’s ban of ICOs, the trend underpinning the hype and inflating the cryptocurrency bubble. According to the People’s Bank of China, virtual currencies that are “not issued by the monetary authorities… do not have legal status equivalent to money, and can not and should not be circulated as a currency in the market use.” The PBC and 6 other regulatory agencies released a statement banning the trading and use of all cryptocurrencies in China. Predictably, the event caused immediate decline in the value of the 15 largest cryptocurrencies by market cap.

$1.8bn raised by ICOs in 2017 so far

ICOs have seen exponential growth, with $1.8bn raised in 2017. They are a highly speculative activity enabling firms to raise large amounts of money within minutes without providing an actual product. In addition to leading to financial market bubbles, the activity also entails serious cyber security and crime threats.

Rising Cyber Crime

ICOs phishing, which involves use of fake websites or social media accounts that resemble the real ICO, is the most successful cyber crime activity, reaching almost the same amount of losses from actual theft. For example, the losses from cyber theft are almost equal to the losses from actual robberies in the US, worth $390m in 2015. Other types of cyber crime involve tapping project loopholes, that once exploited can lead to wealth theft. Both types of threats from cyber crime imply that the ICO infrastructure needs to be fortified in order to prevent abusive behaviour.

A recent analysis by Chainanalysis, a New York company that analyzes transactions and provides anti-money laundering software, uncovered that Ethereum bandits stole $225m in 2017 alone. The theft affected 30,000 ICO investors, who lost $7,500 each, on average. The investors willing to obtain early entry to new token offerings were tricked to provide their credentials and send money to fake internet addresses, allegedly funding sites for token offerings related to the Ethereum blockchain technology.

Meanwhile in Australia, concerns have been expressed about the threat of criminal activities related to cryptocurrencies and online banking services. According to a report released recently by the Australian Criminal Intelligence Commission, Australia is losing $28.3bn annually from money laundering. Australian authorities are concerned that e-commerce businesses and Bitcoin exchanges facilitate criminal activities, due to the lack of transparent transactions and encryption. Controversially, a connection between cryptocurrencies and human trafficking has also been established.

Optimism Prevails

Despite the real threats from cyber crime, chances are that cryptocurrencies will continue soaring in the future, as regulation, the ICO infrastructure and criminal behavior elimination become more developed. The recent Chinese ban is a proof of concept, as according to some experts, the new regulation will eliminate the offensive speculators and leave only the founders with trustworthy products, sensible and well structured token sale process, and international outlook. South Korea has also pledged to “strengthen levels of punishment” for those looking to raise money through ICOs, while the US already in July ruled that ICOs must adhere to strict securities laws.

Moreover, most experts and practitioners are optimistic and positive about the technology, while traders and investors believe its value could reach astronomic heights. Based on a recent prediction by a trader famous for accurately predicting its value, Bitcoin could be worth $15,000 by the end of 2017, while it will increase and stabilize between $40,000 and $110,000 by 2019.

Bright Future

According to top cryptocurrency entrepreneurs, venture capitalists and bankers, gathered during a Fortune Brainstorm Tech conference in Aspen, Colorado, earlier in July, the future of cryptocurrencies, most notable among which are Bitcoin and Ethereum, is bright. Most people who are bullish on cryptocurrency believe that Bitcoin and Ethereum will exist in the next 5-10 years.

The experts believe that there will be newcomers in the cryptocurrency market, as niche blockchain products, such as Tezos, are developed to solve problems. It can be expected that there will be one or two new dominant coins in the market within this or next year. While they believe that ICOs could lead to frauds, market manipulation and insider dealing, which is already well recorded, they also think that regulation will improve and expect transparency during the process of developing the regulatory frameworks. Experts believe that cryptocurrencies will become more stable and reduce speculation and will increase competitiveness, as incumbents improve their services.

Conclusion

As with most cases in financial markets irrational episodes, a bubble is only sustainable as long as the herd behind it supports its behaviour and fundamentals do not pose threats. The assumed bubble in cryptocurrencies could pop due to speculation or real threats such as cyber security and crime attacks and other criminal activities. However, considering the rapid tightening of regulation and awareness of the prospects for criminal activity, which will inevitably lead to stronger ICO infrastructure and protection, cryptocurrencies are well set to become an integral part of the digital economy, which will eventually support their high valuations.

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Asia

China’s Central Bank Reacts to Federal Reserve Rate Rise

 1 min read / 

China Interest Rate Rise

The Story

China’s central bank increased rates on short terms lending instruments within hours of the Federal Reserve raising their base rate from 1.25% to 1.5% on Wednesday. In doing so, the Chinese government aims to put a stop to potentially destabilising capital outflows.

Chinese reverse repurchase agreements increased by five basis points for 7-day and 28-day reverse repurchase by 5 basis points to 3.5% ad 3.85% respectively.

Why It’s Important


source: tradingeconomics.com

The move signals a departure from ultra-low interest rates, which have become the norm since the global financial crisis.

China said their response was a “normal market reaction.” However, the Chinese rate rise was too small to have had a significant effect on capital flows, says Chen Ji, a Bank of Communications analyst. Whether this response will shield China from capital outflows is questionable.

Keep reading |  1 min read

China

Google to Open in Beijing

Google Beijing

Alphabet announced that it will open an AI research facility in the Chinese capital yesterday.

Under CEO Sundar Pichai, Google has been recommitting itself to China after it had most of its services blocked in 2010 when it refused to censor search content. In recent months, the tech giant has been marketing its new TensorFlow AI tools to the Chinese market, which aligns with the state’s ambitions to become a world leader in AI by 2030. Google’s new facility will consist of a small number of AI researchers, supported by hundreds of Chinese engineers. Google expects to face stiff competition for talent given how local tech giants, Baidu and Tencent, are ramping up their own AI efforts.

Keep reading |  1 min read

Asia

Google to Open Artificial Intelligence Centre in China

 2 min read / 

Google AI China

Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.

Fei-Fei Li, Chief Scientist of Google Cloud, said:

“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”

The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.

Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.

Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.

China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.

Keep reading |  2 min read

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