I had just finished a long discussion with a crypto-investing friend who was ten thousand dollars in the hole because his crypto investments were tanking and I was trying to discover what was going down – aside from his crypto investments (and also mine). I stumbled across a headline in The Merkle (September 4th). It read: NEO Price Goes off the Deep End as Chinese Regulators Ban ICOs.
In a nutshell, what I discovered was this. Chinese Regulators have frozen the Chinese ICO market, for the sensible reason that it was getting out of hand, “seriously disrupting the economic and financial order,” as the Chinese put it. The Merkle reporter has linked this fact with the decline in value (the dive off the deep end) of the Chinese cryptocurrency Neo.
Neo had previously been $35 and with this announcement it fell to about $20. Neo is a cryptocurrency, similar to Ethereum, which can be used as a foundation for new cryptocurrencies. So the freeze on ICOs freezes the introduction of new Cryptocurrencies which means less demand for NEO – until China works out what regulations it will impose.
ICOs and SAFTs
What the Chinese are doing is not bad news for the crypto world. There have been a number of ICO scams (Google for Ziber, Eros HQ or SigmaCoin if you want some gory details) and there is an issue that needs to be addressed. ICO stands for Initial Coin Offering – the initial sale of a new cryptocurrency to the market.
As everyone and his dog has noticed there is a wild enthusiasm for ICOs which borders on a mania, driven by dreams of avarice and the rapid price rise of the flagship cryptocurrencies, Bitcoin and Ethereum. Bitcoin has risen (roughly) 700% in the last 12 months ($600 to $4800) while Ethereum was shooting up (roughly) 2400% ($12 to $300). Optimistic ICO investors hope for similar exuberance from new coins.
The problem is not just that some coins have been ponzi schemes and scams, the reality is that many ICO coin purchases are bets on the future value of a coin, which has no actual utility whatsoever at the time of sale. The coin will achieve dependable value only if the underlying business model is successful and the coin can actually buy something. The “investor” often has little more than a white paper and a web site to view in order to assess what the business model is and whether it will work. No wonder there are scams.
In the US, the SEC has been taking an interest in the whole ICO process and recently the mechanism of a SAFT (a Simple Agreement for Future Tokens) has been introduced to cover the situation where a token is being proposed than has no immediate utility. The SAFT is a sale of future tokens that is limited to accredited investors (investors with a net worth above $1 million or annual salary above $250,000) who are assumed to be wise enough to identify a scam. And the SAFT tokens can only be given to the investors when they can be used.
The US legal point here is to distinguish between an investment in a security and the purchase of coin. Put simply, if you can use it, it’s a coin, if not, it’s a security and cannot be sold in an ICO. The SEC announced its policy just over a month ago. See this article. This didn’t tank the market.
Back to China
Most likely the Chinese were watching the SEC. They acted more abruptly than the SEC, so their announcement pushed the cryptocurrency market in a southerly direction causing a rash of speculator panic. Nevertheless, the Chinese can have no intention of damaging the cryptocurrency market, a market in which they play a central role. And actually, they do not have the power to do so. They only have the power to shoot themselves in the foot. Cryptocurrency, as they well know, is stateless and emigrates from stupid laws and idiotic jurisdictions at the speed of an Internet message.
What is happening is ICO regulation, and if it diminishes the level of ICO scams, it’s healthy for the young and blooming cryptocurrency world. And as for the drop in the crypto market. It lost about 20%. It tends to do that a few times every year. It doesn’t even count as a serious price correction.