Post-China ICO Ban: What Has Changed?

It has been more than two months since China’s central bank banned initial coin offerings (ICOs) as part of President Xi Jinping’s ongoing crackdown on capital outflows. What has changed since then?

While many issues remain unclear, China-based virtual currency businesses have changed their operation models to circumvent the ban, and Hong Kong has become a new hub as mainland businesses seek alternative jurisdictions to list their tokens. These ongoing developments and their implications are worth the attention of Hong Kong – and mainland China-based virtual currency businesses and their legal advisers.

Some Chinese virtual currency businesses have sought ways to change their business models to circumnavigate the ban, turning to overseas (mostly offshore) jurisdictions for operations. Some have shifted to an over-the-counter model of peer-to-peer trading, as opposed to centralised exchange platforms. For example, China-based OkCoin launched its offshore exchange, OKEx, and Huobi recently announced a Singapore-based professional portal and the start of a Hong Kong subsidiary, Huobi Pro. OKEx and Huobi Pro said they would introduce peer-to-peer trading platforms that support fiat currency transactions, including the Chinese yuan, as an alternative for the country’s domestic virtual currency investors. Whether the business model shift will lure most, or some, of the trading volume back to the mainland remains to be seen. The shift may attract the attention of the Chinese authorities and generate further probes and investigations into the new model.

China’s clampdown on virtual currency businesses and related trading halts have also driven Chinese investors to list their tokens in Hong Kong to raise funds. And while Hong Kong may take a softer approach toward virtual currency regulation than mainland China, it has not opened its market without limitation. Right after China announced its ban, Hong Kong’s Securities and Futures Commission told investors to be on the lookout for ICO-related fraud and advised ICO issuers that they would be subject to local laws. For virtual currency businesses that choose to go to Hong Kong, it is crucial to understand Hong Kong’s governing laws and regulations.

Many of these shifts’ implications remain unclear. For example, China has not made clear its views on cross-border ICO activities and whether it will “punish” foreign token issuers beyond simply banning their tokens from being traded on Chinese exchanges. While ICO activities are difficult to ban, especially cross-border ones, it is likely that regulators are closely monitoring and may target activities such as marketing, domestic fundraising and cross-border payments going forward.

Despite these uncertainties, recent developments have confirmed what many have already known: The China and Hong Kong virtual currency market is surging, and increased regulatory attention worldwide will be inevitable as it matures.

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Associate, Kobre & Kim LLP (Hong Kong)