As a general rule, China’s regulatory bodies have always struggled to embrace innovation in the same way as western nations. Mainland China was one of the few regions to block Wikipedia after its inception, while it is has continued to impose partial bans in the years since.
Initial coin Offerings (ICOs) are the current focus of regulator’s attention, with these fundraising mechanisms having been recently banned completely by the government. ICOs, which allow projects to raise capital by selling underlying cryptocurrency tokens in exchange for Bitcoin and Ether, are the modern iteration of Public Offerings (IPOs) through which company shares are floated on the stock market.
The questions that remain are whether then ban will remain in place, and if so what impact will it have on the forex market?
Why Have China Moved to Ban ICOs?
While the hype surrounding ICOs has reached fever pitch in the U.S. and other western nations, China have reacted with cynicism and taken direct action against the practice. More specifically, China’s central bank has issued a statement criticising ICOs for disrupting the nation’s financial order, while also describing coin offerings as “a form of unapproved and illegal public financing”. This immediately caused the value of Bitcoin to drop, as while the decision does not reflect badly on the concept of cryptocurrency it does represent another setback in the adaptation of the technology.
Some of this is to be expected, of course, as we have seen a proliferation of ICOs as the value of Bitcoin and similar currencies has soared during the last 12 months. Such familiarity has bred contempt among the financial old-guard, whole the novel nature of some cryptocurrency tokens have also raised eyebrows. Take Filecoin, for example, which despite being ICO-approved is little more than a digital token that is exchanged for file storage and remains hard to take seriously as a financial proposition.
How Has This Decision Impacted on the Currency Markets?
The trend for ICOs look set to continue for the foreseeable future, with the cumulative value of coin offerings having reached a staggering $1.6 billion in 2017 alone. Still, China’s aggressive regulatory stance may soon be adopted elsewhere in the world, with even the U.S. thought to be keen tighten up the widespread use of ICOs. In this respect, China may be blazing a trail for others to follow, rather than assuming the type of robust position that has typically been eschewed by other nations in recent times.
The currency market may also see an adverse effect, with Oanda reporting that the Renminbi fell consistently last week despite previously reaching a 21-week high. It fared particularly poorly against the dollar, and the stringent regulation of ICOs may well continue to have a negative impact on economic sentiment and trigger the sustained devaluation of currencies. This could continue indefinitely, at least until regulatory bodies in America and Europe decide to introduce measures of their own.