Cryptocurrencies have historically been taken up by mostly tech-savvy, young European males. But that is changing rapidly as Asia, like in so much of the global economy, rises. And at the heart of Asia’s economic machine is China – and its financial outlier, Hong Kong.

Asia: Young now, wild now, wants to be free

Asia has been ground zero for a great deal of cryptocurrency growth, for many good reasons. One reason is simple demographics. It’s where the people are – over 60 percent of the world’s population, give or take, depending on your definition of Asia (Cyprus and Israel are in the Asian Football League).

Using Bitcoin, the mother of all cryptos, as a proxy, the user base is overwhelmingly young in an aging world, with over 50 percent being under 35 – like Asia. Europeans have traditionally been the biggest user base, but Asians are gaining fast, with countries like China, Japan and Korea being hotspots.

So-called digital natives have the technological savvy and easy acceptance of new technology to get their heads around cryptocurrencies and feel comfortable with them. They have grown up in a climate where distrust of government seems normal, and that extends to government backed currency.

Furthermore, traditional, government regulated finance looks – to them – to be rigged against them. The easy money world they have grown up in means that inflated real estate prices, good for old people who bought before the great asset inflation, put homeownership out of reach. They’ve never known interest on savings as a “thing.” Regulations mean that access to capital markets has become more and more restricted to heavyweights who can handle the regulatory burden. Traditional banking, especially for those opening small businesses, has become more onerous. For example, the inability of new businesses to open bank accounts made the front pages of newspapers in famously business friendly Hong Kong.

While big banks complain about regulations hurting their ability to manufacture multimillion dollar bonuses for executives, on the ground it means stopping hopes and dreams for aspiring entrepreneurs. They have turned to novel means of fundraising, cheap and cheerful, like equity crowdfunding and P2P lending (where they haven’t been banned – as they have in Hong Kong).

In China, citizens famously play a cat and mouse game with their government vis-a-vis capital controls. Like the Great Firewall, it is more a matter of management through constant attention. Like the flow of information through the internet, money finds a way for a small percentage of the determined. Cryptocurrencies have proven attractive as part of this game for the young and technically savvy. While the rich and connected can use clever private bankers and tax lawyers, the young have seized on cryptocurrencies to gain access to an exciting new world of investment outside of government control.

The giant awakes

China’s influence in this market was seen when it announced, on Sept. 4, 2017, that it was banning initial coin offerings (ICOs). Values of cryptocurrencies, and especially the base currencies used to buy new currencies offered in ICOs (and token sales – see below for an explanation of these), which had been skyrocketing, immediately fell. Bitcoin dived, had a small “buy on the dip” bounce, and headed back down again (as of Sept. 14).

In true China style, not only did this ban apply to future ICOs, but also past ones. In China, everything is forbidden until it is permitted – and ICOs were never expressly permitted.

Recent ICO recipients were asked to return funds to investees and token buyers (a complicated business). All activities were shut down and exuberant ICO promoting conferences, and even tangentially connected blockchain conferences, were hastily cancelled or relocated to Hong Kong. Websites listing ICOs posted notices of closure. For those that had taken money some time ago, they scrambled to find out if the vague and forbidding announcement would have follow-ups that would grandfather their projects or make them fugitives.

The problem, of course, was capital controls. China realized that, like other channels in the past, if left unattended, the crypto phenomena could get away from them, prompting another capital leakage. Like many heavy-handed announcements in the past, China quickly started sending signals it would regulate this sector. As per normally ambiguous Chinese messaging, an influential academic from a state institution spoke to approved media to suggest that the ban was, in fact, a pause to gain time to regulate (Hu Bing from the Institute of Finance and Banking, speaking to CCTV-13). This is a common tactic to cool things off so it can buy time to get a grip on a new elements in the economy that it may want to flourish – under the control of the Party and its government apparatus.

How now Hong Kong?

Hong Kong had a problem. It increasingly struggles to communicate to an intermittently attentive world that is not the same as China proper. When news of locked up young democracy activists and black op kidnappings of booksellers make the headlines, it becomes hard to let the world know that Hong Kong is broadly governed under a different set of rules under the philosophy of “One Country, Two Systems.” In the world of finance, this is most certainly the case.

The Securities and Futures Commission (SFC) of Hong Kong had, in fact, made statements about how it saw ICOs, in the wake of the American SEC statements in July of this year. If it walks like a security and quacks like a security, it’s a security. The SFC, in the wake of the Chinese announcement, clearly restated its position to be clear on ICOs. The message: “Open for business – if you play by our rules.”

Token sales that provide functionality are the new order of the day. The “currency” becomes a token whose principal value lies in its ability to do something, not be a store of value (i.e., money). This normally means accessing an underlying platform that, for example, facilitates trade, provides a service like software, or access to a renewable energy trading grid.

Anything, really (really – do a Google search for RasputinCoin – NSFW). A token may confer voting rights to control a platform owned by a nonprofit, but does not confer ownership – similar to your membership in your local Chamber of Commerce. No profits shall be distributed. So those buying the token for trading, as opposed to using it for its primary purpose, are betting solely on the attractiveness of the token to give access to the underlying business – a little like airline points get you on a plane.

In this measured approach, Hong Kong’s rules are similar to the American SEC and those of Singapore – its perennial rival in the finance space in Asia. It will allow real players – well lawyered up to ensure they are compliant – to play in the space. Aspiring fundraisers in mainland China may consider Hong Kong for a token sale, but definitely not an ICO – which sounds too much like IPO (a security offering).

It matches Hong Kong’s aspiration to walk the tightrope of being open to innovation and disruption while maintaining a proper regulatory regime. Protective, but not stifling. And also it also reinforces Hong Kong’s traditional role as China’s financial steam valve, releasing pressure by allowing China to do something, and not do something.

For now, it appears that Hong Kong will continue to allow this creative means of fundraising to proceed while China takes time to codify its rules. Now that ICOs are out, the young and tech savvy, who may have limited resources, but daring ambitions, will access token sales. The offerings, in one form or another, will continue in Hong Kong under the watchful eye of the city’s regulators – and China’s policy makers – for the foreseeable future.