In order to ban ICO, the next step is to strengthen the supervision of Bitcoin trading platforms

Original title: Applauding the abolition of ICO: Let financing be financing, and technology be technology

On September 4, seven ministries and commissions issued the "Notice on Preventing the Risks of Token Issuance and Financing" (hereinafter referred to as the ban), declaring (initial token issuance) as illegal fundraising, conducting a thorough investigation of various ICO financing platforms, and requiring the withdrawal of projects that have been financed. All kinds of news came in at once, and it was difficult to distinguish the truth from the false, which triggered a lot of discussion and speculation. According to data from Huobi.com, one of the three major virtual currency trading platforms in China, the price of Bitcoin fell by about 17% from before the ban was issued to last Sunday.

The heavy-handed ban on ICOs is due to the dual attributes of tokens

A simple way to understand ICO is to compare it with IPO. A company's IPO is to raise funds by issuing stocks. Investors pay legal currency (RMB) to obtain company equity and have a certain share of the company's future profits. ICO, on the other hand, is for investors to pay popular cryptocurrencies (usually Bitcoin or Ethereum) and then receive a new cryptocurrency (token) issued by the company.

Tokens have two functions: one is as application currency, which can be used to purchase the products and services of the issuing company. This function is similar to game currency, and owning game currency can obtain some game functions. It is precisely because of this application function that most ICO projects are related to blockchain projects, because blockchain projects are more likely to generate virtual currencies that can be applied. Second, some ICOs issue tokens as equity coins, which have certain rights to share in the company's future profits. For example, the famous ICO financing case in 2016, The DAO, raised $150 million by issuing tokens, becoming the largest crowdfunding case at the time. Its token holders can participate in company voting and profit sharing. As for The DAO, which ended with the withdrawal of coins and disintegration due to hacker attacks, this is a later story and will not be discussed for now. In July 2017, the US Securities and Exchange Commission determined that the ICO issued by The DAO was securities financing, which actually clearly stipulated that tokens as equity coins were securities and should be included in supervision. This time, the ban issued by China did not distinguish between application coins and equity coins, and all of them were prohibited.

In my opinion, the heavy-handed ban on ICOs under this regulation is mainly due to the dual attributes of tokens. It has both application attributes and investment attributes. Even if it is a token used as an application currency, its application attribute should be to exchange for the company's goods and services. However, the main profit model of ICO investors in the current market and the purpose of purchasing tokens are not to use these tokens, but to make profits through the increase in token prices and trading in the secondary market. This makes the token acquire the attribute of investment. And this attribute has become the main selling point of token issuance.

When the investment attributes of a commodity exceed its commodity attributes, it is very likely to form a bubble, bringing huge risks. The tulip incident in the Netherlands in the 17th century is a good example. Under the current circumstances, the regulatory authorities observed the possibility of bubble formation, took quick action, and used severe measures to suppress possible bad situations and avoid greater risks. This is very timely and effective.

The next step is to strengthen the supervision of Bitcoin trading platforms

Given the decentralized peer-to-peer transaction characteristics of cryptocurrencies such as Bitcoin, it is neither realistic nor feasible to ban Bitcoin. However, it is completely feasible and necessary to strengthen supervision of trading platforms for cryptocurrencies such as Bitcoin. The real focus is whether Bitcoin has application value in the real economy. At present, the country is vigorously promoting the economy from virtual to real and encouraging the development of the real economy. If Bitcoin has no application value in the real economy, but only investment and speculation value, then restricting its speculation will help guide funds from Bitcoin speculation back to the real economy. This should also be the main reason why regulatory authorities consider introducing restrictions on Bitcoin. Strengthening supervision of Bitcoin trading platforms and promoting the standardization of virtual currency transactions should be the next step for supervision.

Allow blockchain projects with real technical content to develop

While applauding the timely release of this regulatory policy, we should also reiterate the essential difference between blockchain and Bitcoin and ICO. Blockchain is a technical means, while ICO, which is currently rampant in China, is a means of financing. The ban does not allow financing through ICO, but does not prohibit blockchain project financing. In fact, a good blockchain technology application project is not only financed through ICO, but can also be achieved through traditional financing methods such as VC/PE. Blockchain, as a technical means of distributed accounting, solves the problem of decentralized authentication. It has broad application prospects in many aspects such as property rights authentication, diamond and artwork authenticity authentication, etc. Before the blockchain technology, such authentication required a centralized third-party institution, such as a court, arbitration institution, or bank. Blockchain technology makes it possible to simplify authentication. Blockchain is more widely used in the financial field. Application scenarios can be found in payment, clearing, accounting, credit investigation and other aspects. Blockchain technology is still in its early stages of development, but as this technology gradually matures, it will have broad prospects in the future.

In the long run, the policy issued by the regulatory authorities this time should be beneficial to blockchain projects. By removing those deceptive projects without substantial content, we can avoid bad money driving out good money. Let the blockchain ecosystem focus on innovative technological innovation rather than focusing on the attributes of its implicit financial instruments. Let blockchain projects with real technical content have the opportunity to develop.

(The author is a professor at Peking University Guanghua School of Management)