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China to use ICOs to Evade US Investment Restrictions?

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According to a recent Forbes article, a number of Chinese investment firms may be looking at the ICO market as way to get around the investment blockade put in place by the Trump administration. However, the author of the article seems to have missed the main point as to the reasoning for the ban on technology investments from China. However, could ICO’s prove to be a more lucrative or direct method of gaining access to US tech sector as an investment?

China ICOs

The Main Issue

The United States and its technology companies are responsible for generating a countless number of multibillion-dollar patents and technology innovations each year. Most of the world’s most influential tech companies are based in the US, or from the US. Some examples of this would include industry heavyweights like Microsoft, Google, Apple, and so on.

A significant reason for why these companies are so highly valued is because of their vast array of patents and intellectual properties which they can leverage. If anyone were able to simply duplicate a search engine like Google.com by cutting and pasting some code, that could have a significant impact on Google’s business. That’s why technologies like the search engine logic of the Google search engine are highly protected not just by the law, but also of the code itself.

According to Reuters, the Trump administration is not planning on flat-out banning all investments coming from China, and the rules will apply to any country trying to buy up sensitive technologies.

Forced Technology Transfers

The most insidious case which has become largely omnipresent when dealing with China is what’s known as a forced technology transfer.

In simple terms, it goes something like this. A tech company has a product and they want to gain access to the Chinese market. This is because China has a huge population, and an even bigger percentage than most countries of active Internet users. This means that the market is ripe for development and incredibly lucrative. But, in order to gain access to the highly protected and largely internalized Chinese Internet, one needs to play along with the rules of the government.

In practice, this typically results in a foreign tech company being required to enter into a partnership with a local company. Often times, these companies have very close ties to the Chinese government, or may even be outright state owned companies.

Finally, the local Chinese company will typically require the foreign company to give over all of their code and intellectual properties in order to gain access to the Chinese market.

What follows next is something that is perhaps fit for a spy novel. The code is copied, the foreign competitor is blocked from the Chinese Internet due to allegedly not complying with some obscure law, and then a local version of the foreign company is created as a copy and the system continues.

In the above Reuters piece, there have been many “complaints that China has unfairly acquired American intellectual property through joint venture requirements, unfair licensing and strategic acquisitions of U.S. tech firms.”

Furthur, according to Business Insider, the Trump administration may be taking steps to counter the Made in China 2025 plan.

The USTR wrote:

“Foreign technology acquisition through various means remains a prime focus under Made in China 2025 because China is still catching up in many of the areas prioritized for development”

ICO’s a Way Around the Blockade?

What’s happened as a result of these kinds of behaviors is that the Trump administration is beginning to restrict or prevent Chinese companies from investing in or purchasing a number of different types of American technology companies.

The Forbes piece, while written in an oddly rambling fashion, suggests that perhaps the ICO market, or a near-future tokenized securities system could be a way for Chinese companies to still invest in US tech firms.

Read also: Are ICO Tokens and Cryptocurrencies “Securities”?

Not Gonna Happen

Unfortunately for some, this simply cannot happen within existing legal frameworks.

The idea of tokenizing a company into securities tokens instead of releasing stocks has already been widely discussed and considered. The conclusion is that in order for this to happen, the blockchain assets that would represent the securities could not simply be Ethereum ERC-20 tokens, for example.

Instead they would need to be an entirely new type of digital asset that would have built-in smart contract protections so that only pre-approved accounts would be able to hold them. For example, an individual investor would need to create an account that was then verified through a KYC process with some sort of licensed ID processor. This would then create a smart contract within the new account that would allow the account holder to buy, trade, or hold securities assets that are compatible with the account type.

For instance, if a US citizen creates such an account and is verified as a US citizen, this means that they could hold any token securities that are appropriate for a US citizen. They could also get verified as being accredited. However, such an account would not be able to hold Hong Kong issued securities, or those from a country that is under restrictions like Venezuela or North Korea.

While from a technical perspective there is nothing stopping a company from releasing what would be a security token onto a public network like Ethereum using the ERC-20 standard that would have no such restrictions, they would be doing so outside the confines of the law. For an established company like a major tech company, this would be a colossal mistake and something that they would never even consider engaging in. Instead, they would need to use a new type of token that could be restricted and is trackable.

Polymath is an example of how this technology could work.

Outlook Unclear

So after analyzing the situation and what’s already been established, we can say with a relatively strong degree of certainty that using tokenized securities would not be a way for any country to bypass investment laws. Even more so, simply owning tokenized securities of a company would not entitle you to be able to order technology transfers unless perhaps one owns 51% of a company, in which case they would own the company outright.

Again, this would be simply impossible because there is no way that US regulators would allow for investors from a foreign country that was not openly welcomed to simply take over a domestic company, much less an important or sensitive tech company, without prior approval.

And so, while tokenized securities will prove to be an interesting shift in the investment paradigm, it is extremely unlikely that on a large scale, they will allow for hostile takeovers from foreign countries and governments that are already under close watch.



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Robert is News Editor at Blockonomi. A true believer in the freedom, privacy, and independence of the future digital economy, he has been involved in the cryptocurrency scene for years. Contact Robert@blockonomi.com

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