Tuesday, 23 October 2018

How agents are helping investors buy into initial coin offerings, despite their ban in China

‘Where there’s demand, there will be supply … If there are gains to be made, then people will take risks,’ says vice-president of the Hong Kong Blockchain Society, of the enduring appeal of cryptocurrency offerings

ICOs are a form of crowdsourced by which companies exchange their newly created online currencies, called “tokens”, for hard currency.

Before the ban, ICOs were marketed across China using online platforms. But all those sites were closed nationally by The People’s Bank of China (PBOC), the central bank, with operators ordered to return money to investors.

The PBOC has since claimed in a report that a staggering 90 per cent of the ICOs launched in the country were fraudulent.

Its biggest fear was social unrest arising from an ICO proving to be nothing more than a fraudulent way of raising cash from unsuspecting investors.

China wants to be a front runner in blockchain technology even if the ban on bitcoin remains

The monetary authorities were also acutely aware of virtual currencies and coin offers being used by corrupt officials to transfer money out of the country.

The result was a blanket ban on online virtual currency exchanges offering trading services for domestic investors on transactions denominated in yuan.

But today even with that ban in place, online agencies are still advising customers on how to get involved in ICOs, and funnelling interested parties in their direction, via overseas websites.

Instead of offerings marketed directly online, ICOs are often promoted on Tencent’s messaging app WeChat through such agents or middlemen, who are duly charging hefty fees for the privilege.

One agent called An Hui Tian Ce Blockchain charges up to 10 per cent commission for each offering and according to a list its customers have been sent on WeChat, there are currently eight ICOs available, including names such as RightMesh, Dfinity, and Wireline, the last of which is presented on a dedicated Chinese language site. Where they are eventually listing, and their values, remains unknown.

Canada-based RightMesh claims to be the first platform to offer investments in mobile mesh networks – communications networks using radio nodes – using blockchain technology.

Dfinity is building a new kind of public decentralised cloud computing resource, while Wireline is planning to operate a micro-services exchange for developers.

An Hui Tian Ce Blockchain’s customer service representative told South China Morning Post that the charge is required upfront, depending on the amount being bought, and must be paid in ethereum – a token popular among ICO organisers which is similar to bitcoin, still arguably the world’s best-known virtual currency.

Beijing bans bitcoin, but when did it all go wrong for cryptocurrencies in China?

There’s no official data on how many are operating or how much has been raised on WeChat or other social media platforms in China.

But commentators suggest the original risks which prompted the Chinese authorities to outlaw them in the first place still exist – effectively, that these agents could run away after the fees are paid, as could their investments.

CNBC reported last year, for instance, that one start-up ICO for a firm called Confido deleted its site and social media accounts soon after raising US$375,000.

While direct sales online are not permitted, Dragonsocial – a Hong Kong-based marketing agency which helps foreign ICO companies reach Chinese investors – for instance, has also been actively building what it calls “cryptocurrency communities” on WeChat.

“Lots of companies launched ICOs last year, when there were a limited number of investors.

“We thought it was high time to provide them with a service,” said Cao Ming Xiu, its China mainland operation officer.

“There were many cases in China where people posted adverts with big WeChat groups. But that goes against Chinese regulations, and we don’t do that.

“Rather, what we do is community-building. We don’t promote our clients and their ICOs in groups, instead we discuss them.”

He says more than 20,000 such WeChat groups exist nationwide, focused on discussion rather actual ICO execution.

“Some groups have hundreds of people involved. A small percentage of them are our employees, and they lead conversations,” added Raymond Lam, Dragonsocial’s head of growth.

“It is through that, we help members discuss certain new projects.”

Why has China declared war on bitcoin and digital currencies?

The companies Dragonsocial represents, he said, are often involved in fintech and logistics ICOs.

“Through discussion within these groups, there are now [more] people in the mainland capable and aware of reaching overseas websites or official ICO outlets, that allow them to invest in cryptocurrencies,” Cao added.

“The mainland has banned ICOs. So cryptocurrency investors now have to access overseas trading platforms to exchange theirs [cryptos] for US dollars or Hong Kong dollars.”

Emil Chan, vice-president of the Hong Kong Blockchain Society, believes it’s hard to effectively regulate the dealers, without an official licensing mechanism in place.

But with the number of tokens issued last year globally rising a hundred-fold, he says speculators are sure to continue jumping on the bandwagon, regardless of the fears that undoubtedly still exist.

According to ICO tracking firm Token Data, of the 902 token sales launched in 2017, 46 per cent failed to materialise.

“But where there’s demand, there will be supply,” said Emil Chan. “If there are gains to be made, then people will take risks.”

He says a more meaningful way of tackling illegal ICO sales is to issue licences, which is already happening in Japan.

Cryptocurrency exchanges there, require a payment institution licence to operate.

“There is actually no way to ban all unregulated dealers, he said. [If you ban one], they’ll just set up another.”

source: South China Post , DragonSocial

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