To blockchain developers and cryptocurrency watchers, the entire system has a mind of its own and is one step ahead of the market, at least two steps ahead of regulators. It’s lack of physical roots make it nearly impossible to control. China tried. (Shutterstock)
(The original version of this story, published on Oct. 19, said Red Pulse was based in Shanghai and raised $30 million in 10 minutes. It is based in Hong Kong since 2015 and raised $15 million in a little over an hour. It is corrected below.)
It’s official, blockchain technology has beat one of the biggest authorities on earth. The decentralized nature of what has become the backbone of the cryptocurrency craze has proven its mettle. Bitcoin and a host of other highly speculative digital currencies live another day.
Last month, China banned mainland residents from trading in cryptocurrencies on exchanges and made it illegal for Chinese start-ups to raise funds via initial coin offerings — a hybrid of crowdfunding, venture capital, and initial public offerings, to put it simply. Bitcoin prices fell. Ether prices fell. And then cryptocurrency start-ups shook it all off. It was as if they were punched in the face, shook the cobwebs out of their head, and remembered that this whole blockchain thing is decentralized and autonomous. That’s the point. Banned in one country, move to another. Now they’re back on their feet in most cases, like a terminator cyborg hard to knock down.
Bitcoin prices are over $5,000.
China’s regulations might have stopped a few start-ups for raising funds, but the general consensus is that this is temporary.
"The ethos behind blockchain has been tested," says Ken Sangha, COO of Open Money and the Open Project in San Francisco. "A central, organized and powerful authority — China — said ‘no’ and we all have been tested worldwide because of it. But the system flexed its muscles. It’s doing what it was supposed to do."
Sit. Stay. Good Dog.
Not even an obedient service dog can sit still forever.
Sangha was going to launch an ICO in September for Open Money, a developers platform like Java that would allow app makers to include user options to purchase their products with cryptocurrencies in app stores. The Chinese ban put their ICO on hold. Most of their investors were Chinese. Start-ups from San Francisco to Moscow had similar problems.
Malta-based Providence Casino, a physical, crypto coin casino being planned and shooting for an ICO this year was initially targeting Chinese investors in the mainland. They were banned from doing so. Instead of marketing to Chinese en masse, investors are only brought on board if they have personal relationships with the company founders, a sort of who-you-know system of project finance networking.
Chinese augmented reality start-up Metaverse reportedly lost out on a number of cross-border tie-ups and other deals. Its CEO Eric Gu did not want to talk on the record.
Shanghai-based exchange C2CX had to temporarily scrap their planned joint venture with a Russian company called KickICO as key money men like CyberTrust of Switzerland dropped out for now. That project, a China-Russia exchange for Chinese investors to buy tokens of Russian start-ups listing on KickICO is still planned once the dust settles on the regulatory environment, the two partners said.
"China is a main source of crypto investing and the bans just mean that that capital will go to projects based elsewhere because the local ICO platforms will not be able to attract new start-ups," says Scott Freeman, CEO of C2CX. "For China, financing their blockchain companies is just going to happen outside of China. For foreigners looking to tap Chinese money, they will either wait a while or look elsewhere. People are adjusting."
Companies are adjusting. Chinese blockchain developer Bibox set up shop in Estonia, instead.
"Let’s put it this way, they opened up in Estonia after the ban and moved fast," says Vlad Dobrov, a blockchain investing consultant based in Singapore. "As you can clearly see from their website, from every angle, they are targeting Chinese investors. Their founders all came from the top Chinese exchange. They know what they are doing."
There are ways around the ban, everyone will tell you. They include more peer-to-peer investing done in private rather than the traditional Kickstarter-esque crowdfunding method that some start-ups use on ICO platforms like KickICO in Moscow, now gathering hundreds of new tech companies, including American ones.
Non-Chinese ICOs didn’t kill their start-up funding plans because of China bans (and subsequent bans in South Korea). Instead, most put their plans to launch on pause to figure out ways to legitimize their activity and find the right investors now that crowdfunding these things in China is illegal under the ban. Chinese with crypto wallet accounts in Singapore, Hong Kong, London and elsewhere are still buying tokens of companies listing on exchanges and still speculating in cryptocurrencies.
Open Money found Chinese smart money. They built relationships with Chinese venture funds over the years and private asset managers who are now delving into the crypto markets. Those funds in China are known as "whales". The whales tend to be large investment firms with tens of millions of dollars to throw around, often belonging to the family offices of Chinese multi-millionaires and billionaires.
"We are definitely getting Chinese money and are still talking to a number of China-based funds," Sangha says.
See: China’s ICO Ban Doesn’t Mean It’s Giving Up On Cryptocurrency — Forbes
China-Like Wages Now Part Of U.S. Employment Boom — Forbes
Russia Faces Eternal Battle Over Bitcoin — Forbes
Chinese President Xi Jinping delivers a speech during the opening session of the 19th Communist Party Congress held at the Great Hall of the People on October 18, 2017 in Beijing. Xi is expected to meet with some of the biggest movers and shakers of the blockchain world this month. Cryptocurrency regulations will be a hot topic everyone will be paying attention to in China. (Photo by Lintao Zhang/Getty Images)
Nearly all of these new start-ups are developing technology reliant on cryptocurrency as a finance or payment mechanism. All of them are tied into the autonomous, decentralized digital ledger of blockchain technologies. They are bypassing venture capitalists who demand equity in exchange for investment capital. They are all similar in their statelessness. Their founders are often based in countries that are not their first homes. Russians in San Francisco. Chinese in Tallin, Estonia. Their brain power is often separate from their legal offices; offices that are easily movable to other cities and states. Their marketing team is holed up somewhere in the Italian Alps. Unlike Apple and Facebook stocks dominated by American shareholders, their investor base is global, though increasingly Asian.
They exist in a sort of virtual, science fiction world and don’t have factories or skyscrapers. Their companies can be created in a WeWork rental office, or condo in St. Kitts with good wifi. They launch an ICO and become overnight millionaires. It is a lot like being a garage band with the audience size of Bruce Springsteen, deadmau5, Taylor Swift, and Beyonce, combined. No wonder everyone is doing it. They’re everywhere and nowhere at the same time, and for this reason, the powerful Chinese government has failed to put a dent in demand for anything cryptocurrency related.
On the other hand, the question is, does China really want to ban it?
Most people with first-hand insights into the market there will say no.
Red Pulse, a two-year-old Hong Kong-based market intelligence platform covering China’s economy and capital markets, did an ICO on Oct. 8 and raised $15 million in less than 90 minutes, despite being closed to mainland Chinese investors. That’s double what they were hoping for. The company said many Chinese start-ups are relocating to Hong Kong to raise crypto cash via ICOs.
Ian Holtz, founder of Orion Technologies in Denver is now in Barcelona running a new start-up called Aphelion. They’re building on the same Chinese platform as Red Pulse, called NEO. Like everyone else in the blockchain community, Aphelion will create their own product token in an ICO planned sometime next month, hoping to follow Red Pulse’s path on the NEO platform in raising a few million bucks in a matter of minutes.
"NEO took a little hit because the crackdown raised some eyebrows, but I think it is to their benefit in the long run," Holtz says, thinking NEO can beat the competition. "NEO is working directly with the Chinese government to carve out what regulations will ultimately look like. They’ve proven themselves in China. I think there is actually some pride in Beijing at what NEO has accomplished," he says.
This month, Communist Party leaders will meet with fund managers and major cryptocurrency operators to hammer out what to do about regulations. If they want to centralize something that is innately designed to be decentralized, they will lose out. China money is already going offshore, and it is not just doing it to buy real estate anymore. It’s going offshore to invest in digital assets.
"We’ve had many investors from China with mutual investment agreements of $10 million or more and now all of them plan to register funds outside of the country where it is easier for them to participate in ICOs," says Alex Bessonov, CEO of Silicon Valley-based BitClave, a company building search-data privacy software powered by blockchain technology. "It’s entirely proper for the Chinese government to seek protections for consumers and prevent investor fraud. But to confine capital raising as the central bank would do is to ignore the enormous societal value that blockchain technology presents," Bessonov says.
Chinese regulators clearly wanted to avoid panic in the market. ICOs were being launched like fireworks on a Chinese New Year. The central bank demanded companies return funds to their investors. Most of them did, only to get the money back through Hong Kong and Singapore based bank accounts, sources in China who wished to remain anonymous said.
Other firms working with high net worth Chinese in Shanghai and New York said mainlanders will go to Hong Kong. "Everyone is looking for fast money in China, and the liquidity to get in and out of an investment," says Tristan Zhang, managing director of Helix Capital. "We know where a lot of them went; they went right to Hong Kong and did their ICOs there instead."
Chinese investing culture is casino-like. Some new coins have literally doubled overnight once retail Chinese investors got a hold of them. The last thing Beijing wants to see is a bunch of unsophisticated investors losing thousands in speculative investments in start-ups that have no assets, no income stream, and may even be nothing but snake oil.
"I think regulatory efforts should focus on containing and limiting the potential for harm," says Bessonov. "We are hopeful ICOs will come back to China again."
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