The cryptocurrency gold rush stumbled somewhat over the Labor Day long weekend, hitting a number of large bumps, resulting in a Bitcoin and Ethereum price fall, and ending weeks of steady growth. The problem started with a market correction that occurred over the Saturday-Sunday period, as Bitcoin approached $5,000 for the first time. Market watchers considered this number to be a psychological milestone, and it resulted in major selloffs. which brought Bitcoin back down to around $4,400. This market correction was expected by many investment houses, given the magnified volatility that these currencies continue to exhibit.
More significant, however, was the joint announcement from the People’s Bank of China (PBoC), Chinese securities and banking regulators, and the Chinese government, that essentially made Initial Coin Offerings (ICOs) in that country illegal.
ICOs have proven to be extremely successful methods for raising capital, but have come under scrutiny due to their inherent lack of accountability and investor protection. In many cases, eager investors have thrown their virtual money at an appealing new ICO, using faith and enthusiasm as their primary motivators. Some ICOs have indeed done well, while others have been plagued by theft or failure. Such freewheeling activity caused the United States Securities and Exchange Commission to announce this past July that they would start treating ICOs as securities, subject to appropriate oversight and regulations.
The PBoC statement slammed the brakes on a large number of ongoing ICO projects in China, causing widespread consternation among investors who urged their clients and colleagues to sell quickly. This contributed substantially to the ongoing drop in Bitcoin and Ethereum Prices. The joint statement also said that “Individuals and organizations that have completed ICO fundraisings should make arrangements to return funds.”
The ruling does not prevent Chinese investors from participating in offshore ICOs, however.
To add further panic and confusion, the statement intimated that cryptocurrencies themselves may become illegal, since they are “not issued by the monetary authorities… do not have legal status equivalent to money, and can not [sic] and should not be circulated as a currency in the market use.” Others have interpreted this statement as not pointing to a complete ban, but a great deal of uncertainty remains.
At the same time, a task force of government and financial bodies in South Korea officially pledged to monitor digital currencies like Bitcoin more closely. As described in cryptocoinsnews.com, “the report also suggests that authorities will “punish” initial coin offering (ICO) fundraising platforms for violating the capital market act by raising funds through stock issuance using digital currencies.” The report quoted an official who added, “We will clearly state the foundations of the Act on the Regulation of Conducting Fund-Raising Business Without Permission for illegal fund-raising impersonating digital currency investment and strengthen levels of punishment.”
Ethereum Hardest Hit
It is the Ethereum platform that has taken this hit the hardest. When looking at the Bitcoin, Ethereum price fall together, the value of Ether dropped 20% overnight. This is not the first flash crash for the Ethereum currency, but it took the brunt of the panic largely because the Ethereum platform is the one favored by organizations launching ICOs.
The Evolving Legitimacy of the ICO
The actions of the Chinese and South Korean financial regulators point to the ongoing evolution of ICOs as a new marketplace that is still far from mature. In a short space of time, the token-based economy upon which ICOs operate has gone somewhat mainstream. Large-scale online exchange houses like Coinbase hold millions of dollars’ worth of Bitcoin, Ether and LiteCoin for small-time investors. Even Paris Hilton is getting in on the ICO bandwagon with her “non-endorsement endorsement” on Twitter of the upcoming LydianCoin ICO.
Such visibility and activity has caught the eyes of regulators in countries around the world. Many feel that the increased scrutiny was a long time coming, and is essential to balance out the entire cryptocurrency/blockchain market for the years of explosive growth to come. Others see the move as being focused largely on fraudsters and organized crime, who have been extremely active in money laundering, hacking and other activities, shielded from the long arm of the law primarily by their criminal sophistication. There are not enough cohesive and coordinated levels of law enforcement, from IT through to government, to keep tabs on criminal behavior.
The Labor Day Bitcoin and Ethereum Price Fall will likely be short-lived. There is too much activity and volatility for either currency to stay down for long. And as compared to an earth-shaking development like Mt. Gox, actions like market corrections and government intervention are to be expected and weathered, even if they do cast the concept of a centerless financial network in a somewhat less “centerless” light.