China Seeks Greater Cryptocurrency Control, But Will Drive Capital To Privacy Tokens

In the last few weeks, China has moved against cryptocurrencies. First, they acted to ban funding for Initial Coin Offerings (ICOs). With immediate effect, the People’s Bank of China (PBoC) banned ICOs, dubbing them as an illegal scheme for money laundering, and mandated organizations and individuals that have completed fundraising through ICOs to make relevant arrangements to return funds. A week after this initial statement, the PBoC released a second notice, extending this ban to exchanges that convert digital assets to or from fiat currencies.

This is not China’s first attempt to control the rise of the digital asset investment class. The PBoC, in addition to other nations, has employed multiple avenues to control movement of its national currency to various cryptocurrencies, including Bitcoin, to no avail. These attempts have included a ban on users’ ability to withdraw Bitcoin on Chinese exchanges in the first quarter this year, which was then rescinded the following quarter. Back in 2014, there was also a rumored move to halt all bitcoin transactions in the country, which itself came after an actual ban on financial institutions from handling Bitcoin transactions in 2013.

These regulatory actions have repeatedly caused uncertainty for speculators, and the latest ban sparked an immediate drop in digital asset market capitalizations across the board, particularly in Bitcoin and ICO platforms, such as Ethereum, NEO, & Waves. Still, despite all these regulatory actions and subsequent falls in market caps, speculators have continued to move to technology-built and decentralized governance-based currencies as a substitute for depreciative and central bank-backed currencies.

This trend will grow faster in the coming months and years as nation-state citizens, investors, and speculators alike will respond to global regulatory actions by buying privacy-oriented tokens to circumvent centralized capital controls and potential overreach of privacy. This will occur in parallel to increased investment in more traceable currencies, such as Bitcoin.

What is a Privacy Token?

Privacy tokens are currencies which use computational proofs to mask transactions and counterparties, while still providing provenance using a blockchain. This means that anyone transacting with privacy tokens can be confident in anonymity. Popular privacy tokens include Monero, ZCash, and Dash. Each of these tokens uses a slightly different algorithmic or protocol model/structure as a means of obfuscating sender, receiver, transaction histories, and amount transferred for each transaction. The technical methods vary but they effectively render all of these tokens anonymous.

Given the currently stringent regulatory environment in China, and movements toward greater regulation in a number of other jurisdictions, we believe there will be increased movement toward privacy tokens.

The proverbial "pandora's box" has been opened on token investments, and the appetite for outsized returns is seemingly insatiable. Therefore, this ban will not entirely quell investment in this space, but rather cause capital to flow from one cryptocurrency to another, as users want to maintain exposure to this burgeoning asset class that has grown to above $100 billion over the last five years. Given the oversight and restrictions placed on ICOs and other cryptocurrencies, speculators will opt for a more covert coin, and we will see capital flow to privacy tokens.

About the authors:

Christopher Keshian and Ari Nazir are managing partners at Neural Capital, a San Francisco Bay Area digital asset hedge fund, actively managing a portfolio of blockchain assets.