• CFRED CUHK Law

How banning ICOs in China and South Korea changed overseas ICO markets

Cristiano Bellavitis, The University of Auckland;

Douglas Cumming, Florida Atlantic University;

Tom Vanacker, Ghent University


-- Companies and individuals alike are increasingly interested in Initial Coin Offerings (ICOs) as an innovative means of entrepreneurial financing and participation in investing activities. Part of what makes ICOs so attractive is that they are supposed to circumvent the regulatory pressures of governmental institutions. Even though they are intended to operate globally, surpassing borders and nations, the reality is that local policymakers and regulators are still able to impact ICOs in various ways and with far-reaching consequences.

Through an ICO, entrepreneurs raise capital by selling tokens to a crowd of investors. Often, this token is a cryptocurrency – a digital medium of value exchange based on the distributed ledger technology. The first ever ICO was launched in July 2013 under the name Mastercoin and in this short period of time, ICOs have certainly become a global phenomenon. Yet the development of the ICO market has been very volatile, with some 7 billion USD raised in 2017, 19.7 billion in 2018 and 4.1 billion from January to October 2019. Recognising its financial potential, governments around the world have been trying to decide on how to react to the emerging ICO market and the opportunities and stakes involved.

Unsurprisingly, ICO’s laissez faire model has been a cause for concern particularly among risk-averse governments. For example, for China and South Korea, the model resembles fraudulent pyramid schemes a bit too closely and their scepticism culminated in a complete ICO ban in 2017. Our recent research paper ‘Ban, Boom, and Echo! Entrepreneurship and Initial Coin Offerings’, recently accepted for publication in Entrepreneurship, Theory & Practice, focuses on the aftermath of this ban. Specifically, we took to institutional theory in an attempt to answer the question of how the ICO ban in China and South Korea influenced the number and quality of ICOs in other countries. By looking at how the ban contributed to new entrepreneurial finance markets overseas, we depart from the common approach in the literature which by and large analyses the effects of coercive governmental regulations on their own countries’ markets.

In our research, we used quarterly data from 108 countries on the number of ICOs and their quality ratings between 2015 and 2019. Our first finding is that the China/South Korea ban initially made entrepreneurs rush to the ICO market in other countries, saturating the market with lower-rated ICO projects. However, we did not find evidence that this rush had an immediate impact on the ICO volume fundraised, suggesting that ICO investors did not chase after the increased offerings.

After the initial rush, we found that the ICO market slowed down, with a decreasing long-term trend in the number of ICOs and volumes raised. Interestingly, the long-term effect of the ban reveals that the number of low-rated ICOs declined significantly, while the number of high-rated ICOs remained remarkably robust in a generally declining market. This is to say that although the China/South Korea ban caused an initial low-quality rush to the ICO markets in other countries, these dubious investments eventually evaporated, leading to an increase in the average ICO ratings.

Average ICO rating and number of high/low rating ICOs launched (Q3 2015 – Q3 2019)


From a policy perspective, our findings are particularly useful as they demonstrate the need for international coordination in the area of ICO regulation. National regulators and policymakers cannot operate independently without regard to ICO policies in other countries. They should be particularly concerned with the fact that regulatory actions in other countries can, for example, create a surge in lower-rated ICOs in their own national markets. The good news is that foreign regulatory actions can also eventually have positive spillover effects in other jurisdictions which should only incentivize future intergovernmental cooperation in this sector.

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