The crypto market, especially in China, has been in a panic in these past few days, largely because of an official notice on Preventing Risks of Fundraising Through Coin Offering, jointly issued by the People’s Bank of China (PBOC), the Cyberspace Administration of China, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Commission and the China Insurance Regulatory Commission.

There seems to be a general fear that China’s attack on Initial Coin Offerings (ICOs) and tokens, often used to fund blockchain innovation and open up investment in blockchain technology to the masses, will stifle blockchain development and the industry as a whole in one of the world’s largest markets.

At first glance, the harshness of the statement seems to be comparable to the Chinese government’s 2013 warning that made bitcoin prices plummet immediately. However, those in the West who suspect that China is stifling Chinese innovation are underestimating the political wisdom of the Chinese government. Meanwhile, those in East critcizing China’s ICO policy for being too harsh as the government moves to protect the interests of private investors are ignoring the Chinese government’s history of decisiveness in tackling “illegal public funding” in recent decades.

Western critics should think about China’s economic development and gains during the past decades since a policy of openness was initiated in 1978; in this context, the government’s latest statment can be read for its underlying message. Eastern critics should understand that the Chinese government has zero tolerance for any activities that will jeopardize its financial stability.

The second-largest economy in the world managed to weather the financial crises of both 1997 and 2008: This was not simply chance. China’s economy is both innovative and ambitious. Since blockchain technology is acknowledged as the next-generation technological powerhouse, with the potential to reshape the way value is exchanged, there is no reason for China to do anything to harm blockchain innovation. China is not cracking down on blockchain technology: It is actually poised to lead blockchain development not only in its own country, but also around the world.

Breaking Down the Language

First, though the original text is subtle, it is crucial to note that PBOC’s statement on September 4 only targets illegal ICOs instead of targeting blockchain companies as a whole. The translation of original text is: “No organizations or individuals shall conduct any illegal token financing activities (ICO).” The underlying interpretation is that where there are illegal ICOs, there will also be legal ICOs (or “token financing atctivities”), which requires the introduction of new regulations.

Besides avoiding the use of the word “blockchain” itself, the statement also reveals another subtlety: It uses the term “virtual currencies” to refer to all ICO tokens. This word choice is particularly telling. In the past, when People’s Daily, the party-run newspaper, described bitcoin as “digital gold” ― for instance, in an article published in May ― it used the term “digital currency.” It is important to interpret the Chinese language, especially specific word choices made by official sources, very carefully. By choosing to use the word “virtual,” a word implying “unreal” and “insubstantial” in Chinese, the legitimacy of ICO tokens has already been undermined.

Second, what happened in the Chinese crypto market in the past few months has impacted the government’s bottom line: Its financial stability has been threatened. Although many Westerners in the crypto space are familiar with a few Chinese projects like NEO and Qtum, the Chinese crypto market has actually witnessed the recent advent of more than 65 ICO projects, with around $400 million raised, according to a report issued by National Committee of Experts on Internet Financial Security Technology.  

The absolute number is not enormous, but the key is that most of these projects are unreliable and even fraudulent, with no open-source codes and sometimes without any white paper. Some projects even provide huge discounts to pre-ICO investors ― thereby dooming those who joined the official ICO to lose money, even after building up hopes of 10x returns. It is this sort of irresponsible behavior that compelled the government to step in before anything more extreme happened.

Furthermore, any financial activities involving financing from the public are particularly suspect in the eyes of the Chinese government. Wu Ying, once China’s most successful businesswoman, was sentenced to life in prison in 2014 for “illegal funding from the public.” Also, E Zubao, once the country’s biggest online lender, was condemned by Chinese authorities as a Ponzi scheme after the company was found to have squandered the money raised from the public (which should have been used to match investors to potential borrowers). The losses can be considerable: Around $7.6 billion was involved in the E Zubao case, for instance.

Past transgressions like these are chiefly to blame for China’s current suspicion of ICOs. It is perhaps no surprise, in other words, that the government is declaring ICOs to be illegal, while requiring the return of all tokens to investors. China is being characteristically cautious regarding anything posing potential risks to its financial stability.

Third, while China still encourages innovation within the blockchain industry, it needs a regulated crypto market. It may regulate ICOs, the exchanges, and information disclosure channels. But the reason behind this regulation stems from a need to create a sound environment for blockchain development in China.

According to China’s Premier Li Qeqiang last year ― in the government’s 13th Five-Year Plan for Economic and Social Development ― blockchain technology has been listed as an important area of development for Chinese endeavors. This overtly positive support of blockchain technology will not be changed easily. Other evidence of official support of blockchain technology abounds. For instance, a news program on CCTV stated that China is only pausing ICOs, not banning them outright. And the news section of the official site of the Chinese government also reposted an article stating that “China can potentially become the leader in blockchain industry.” (See image below.) These are all subtle signals that China is preparing for a better blockchain world.

In the blockchain session of the Global Digital Marketing Summit, held by the Guiyang government in western China in July this year, the government also mentioned that a “sandbox mechanism” will become an important step for investors to invest in projects without worrying about policy risk (as the sandbox will allow for a more open space for qualified projects to be promoted and financed).  

An article on the official website of the Chinese government: China can potentially become the leader in blockchain industry

ICOs are among the first experiments for the blockchain industry to explore its own business and financing models. It is normal that a new industry and its encumbent business model will find itself in conflict with the existing laws of a given country at some point. To make some corrections and to embrace compliance guidelines will not harm the industry in the long run.

China’s attitude toward blockchains and ICOs has had such an impact on the global token price that it has actually affirmed the importance of China’s role in the industry. Its recent policy is an attempt to maintain financial stability and set the tone for the future of the industry in China.

Fears that China will confine or even kill the blockchain industry are not tenable. Furthermore, China has a large and solid foundation of internet and mobile device users, and a world-class level of infrastructure. If the blockchain industry really has the potential to further improve human commerce and civilization, China’s market will serve as the best test case.

Even if in the end, the new policy makes it harder for blockchain projects to be financed in China, when one considers that internet giants like Alibaba, Tencent and Jingdong have all based their businesses in China but found financing mainly outside the country, there is really no need to worry about the development of blockchain in China ― let alone the rest of the world.