After superpower China announced earlier this week that it has banned Initial Coin Offerings (ICO), the value of bitcoin fell 11.4% immediately after. Circulating speculations claim the ban will impact the large amounts of capital raised from ICO, a total of more than $1.7 billion from January to early September 2017.
What is ICO and bitcoin? What impact does it have on businesses and why did China, one of the world’s most influential countries, ban something so lucrative?
What is bitcoin?
Invented by the then-unknown creator Satoshi Nakamoto in 2009, bitcoin is a ‘peer-to-peer’ electronic currency. It has no physical form so it does not require a central location to store.
In other words, bitcoin runs independently from banks and financial institutions and without any involvement from those institutions, bitcoin transactions are ‘free of charge’ but this also means if they get stolen or lost, there is no possible way to recover losses.
Cryptocurrency is any currency associated with the internet that uses cryptography – the process of converting legible information into an almost uncrackable code, to track purchases and transfers.
Cryptography was created to cater to the need for secure communications in the Second World War. It has evolved in the digital era thanks to mathematical theory and computer science, to become a way to secure communications, information and money online.
Bitcoin was the first cryptocurrency, other examples include Ethereum and Ether.
How does it work?
To buy or sell bitcoin, users need to have a bitcoin wallet installed on their desktop or mobile devices. The identity of users are kept anonymous but transactions are tracked with digital identification comprised of a bitcoin address and a private key.
Think of your bitcoin address as a transparent safety deposit box. Everyone knows what is inside but only the private key can access it. These “safety deposit boxes” are public logs called blockchain.
How do you get bitcoin in the first place? Users typically take part in mining.
Mining is the act of verifying bitcoin transactions by contributing computing power to match private key to bitcoin address. Whenever a new block of transactions is created, it is added to the chain of blocks, hence the name. Still with us?
For comparison’s sake, blockchain technology is similar to Google Docs.
Before the arrival of Google Docs, users could only edit documents via Microsoft Word one person at a time because two users couldn’t edit a document simultaneously. With Google Docs, both parties have access to the same document at the same time if they are provided access.
Blockchain technology is like a shared document, but it is a shared ledger.
What is bitcoin used for?
Blockchain solves two challenging problems associated with digital transactions: securing information and avoiding duplication making the technology widely applicable to multiple use cases.
It also eliminates all the pain points with transferring money through traditional methods: crossing borders, rescheduling for bank holidays, high bank fees, failed/dropped transfers, etc.
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” – Don & Alex Tabscott, Blockchain Revolution
Because bitcoin allows users to stay anonymous, it has raised concerns in its application to facilitate drug deals, money laundering and illegal purchases. But as with all crime, there is a price to pay if caught.
“But if you catch people using something like Silk Road [bitcoin market], you’ve uncovered their whole criminal history,” Sarah Meiklejohn, computer scientist at University College London, says. “It’s like discovering their books.”
In more positive applications, tech giants like IBM are utilizing blockchain technology for information storage in healthcare, government, and supply chain for its accuracy and transparency.
Estimated spending on blockchain technology by banks in 2019 can be as high as $400 million.
Telegraph recently reported that there are currently 15 million bitcoins in circulation, each of which is worth $4,231 (as of September 2017). A single bitcoin’s sharp increase in value has many sceptics believing that we are in a bubble.
Back full circle, what’s the big deal with ICO?
Similar to an Initial Public Offering (IPO), an Initial Coin Offering (ICO) is when a company offers a chance to invest in a new cryptocurrency. Instead of trading shares, companies exchange their newly created cryptocurrencies, known as tokens in ICO…essentially, code.
An example would be OmiseGO ICO in August, when the payments company raised $25 million selling its OMG tokens. Since then, many news outlets are reporting millions of dollars raised in selling cryptocurrencies in a matter of a few hours.
China banned ICO because its legality is described as ‘undefined’ and it was only in July this year that US regulators began looking into it.
According to Sun Guofeng, director general of the Chinese Central Bank, banning ICO was a necessary move to stop illegal fund raising.
China-based ICOs raised about $400 million through 65 offerings with more than 100,000 investors. If it all came crashing down, China would be in hot water.
What is the future of ICO around the world and in Southeast Asia?
To clarify, holding cryptocurrencies in China by private parties is still legal. The People’s Bank of China only makes it illegal for financial institutions to hold or transact in them. It does not mean that there is no opportunity for Chinese developers and service providers in cryptocurrency.
While countries are slowly trying to control ICOs, the Southeast Asian market sees bitcoin as an opportunity to improve the financial maturity of its citizens, over 70%of whom are unbanked.
Singapore has been dubbed to be the next ICO hotbed given its a favorable location for startups, favorable regulatory standards, and supportive tax measures.
And developing markets like Vietnam are embracing digital currency as showcased by smart vending machine startup Dropfoods that announced its ICO this week and Myanmar’s SKYBIT that aims to open the country to a global market through bitcoin.
Bitcoin is not evil. Digital currency is not the bad guy. What has fueled the “ICO bubble” uproar is the excessive optimism that is outweighing rationality that usually comes with smart investing.
Tokens purchased by “investors” in an ICO can be used to transfer value within the new coin’s ecosystem, or to other cryptocurrencies’ ecosystems. The problem is that there is a high likelihood these ICO projects will fail. Why?
Take it from the creator of a famous cryptocurrency.
“Many firms are issuing a coin not because it makes sense to do so, but because they have a product they can sell quickly.” – Ethereum founder Vitalik Buterin