ICO Regulations – Understanding Why China Took the First Move

The following guest article was written by Itai Damti, co-founder of Leverate and advisor to several cryptocurrency companies. He also serves as a fintech mentor at 500 Startups in San Francisco.

While several regulators issued circulars on ICOs recently- the SEC in the US, the SFC in HK and the MAS in Singapore to name a few- none of them has taken strong actions. Most of these regulators prefer to look closely at a situation, gradually refine their definitions and eventually stop only what they see as a clear violation of clear rules.

China took a different path and decided to ban ICOs altogether. There are several things that make China more sensitive to ICs than other countries: consumers who are especially fast to adopt new online trends, highly sophisticated scammers and an overall less mature financial system.

I believe that the government isn’t trying to put a permanent end to ICOs, but it sees the need to cool down the field until it understands and regulates it. This ‘ban first, resume later’ modus operandi isn’t new to the cryptocurrency ecosystem in China: earlier in 2017 exchanges in the country complied with a temporary no-withdrawal policy.

So what’s next for ICO regulations?

In the short term, more announcements by regulators- especially the SEC- have the potential to upset the market or at least make startups and exchanges more careful with how they go to market. The SEC might also choose to make examples out of certain ICOs, possibly even before they define clear guidelines. Forward-looking ICOs are trying to avoid this fate by adopting self-regulation standards today (such as those offered by CoinList or Stokens).

In the medium term, many projects that raised money through ICOs will start to fail due to poor execution or lack of business case. Some failures will ring even louder with stories of bad governance, low transparency and zero investor protections. This will probably accelerate the creation of mature legal frameworks for ICOs, and I believe the market will eventually converge into something that looks a lot more like equity crowdfunding.