In our country, where a regulatory sandbox for RWA has not yet been established and ICO activities are explicitly prohibited, going to Hong Kong for RWA may be the optimal solution for our enterprises.
Written by: Xiao Za Legal Team
As the intersection of traditional finance and blockchain technology, as well as crypto assets, deepens, RWA is becoming an alternative to traditional financial tools such as asset securitization and IPOs, bringing new ideas and methods for the circulation and trading of assets.
In simple terms, the basic process for the compliant issuance of RWA projects is as follows: choose suitable assets ➡ determine the issuance plan ➡ asset evaluation and audit ➡ build a tokenization platform to issue tokens ➡ obtain regulatory approval for compliant issuance.
Today, the Xiao Za team will discuss this interesting topic of RWA from three perspectives: "selection of underlying assets," "selection of issuance plans," and "selection of issuance regions," based on practical experience and the latest successful RWA cases.
01 Selection of Underlying Assets — The "Key" of RWA
From the practical experience of the Xiao Za team, the most critical aspect of issuing RWA projects at this stage is learning how to correctly select the underlying assets for the RWA project.
Indeed, crypto assets are becoming an important tool for reshaping the global financial landscape, but due to our limited understanding and the different basic national conditions of various countries, the development and popularization of new things (especially those with financial attributes) must go through a slow process. This leads to varying degrees of acceptance of crypto assets in different countries and jurisdictions.
Therefore, correctly selecting an underlying asset not only helps to endow the RWA project with a more reasonable, reliable, and visualized "value," but also assists in becoming a truly feasible "financial innovation" project in the eyes of regulatory agencies, rather than an illegal fundraising or financial fraud project.
From the currently prominent and compliant successful RWA projects in our market, the selection of underlying assets generally has the following characteristics:
(1) Physical assets;
(2) Possessing "green economy" attributes;
(3) Capable of generating stable cash flow;
(4) Overall asset value is moderate, with long-term stable market prices.
It is worth noting that the reason why there are many underlying assets with "green economy" attributes is mainly because most domestic companies choose Hong Kong as the destination for issuing RWA, complying with the Ensemble sandbox launched by the Hong Kong Monetary Authority. Currently, the first phase of the Ensemble sandbox experiment focuses on the tokenization of both traditional financial assets and real-world assets, with an emphasis on four themes: (1) fixed income and investment funds; (2) liquidity management; (3) green and sustainable finance; (4) and trade and supply chain financing.
Among these, green and sustainable finance is essentially the key area where mainland Chinese enterprises can easily score points while also considering financing benefits when selecting RWA underlying assets. Therefore, the two successful projects we see in the market currently—charging piles from a certain new group and photovoltaic power stations from a certain technology company—are both such underlying assets.
Of course, as the entire market develops and opportunities for overseas RWA platforms increase, the Xiao Za team believes that while "green economy" will still be an important consideration when selecting underlying assets, it will not be a decisive factor. After all, the essence of underlying assets is to provide the core value of the RWA project, and the ability to generate stable cash flow and have high market recognition is key.
02 Selection of Issuance Plans
From the current market practice, there are mainly two types of issuance plans for RWA: one is the direct issuance model; the other is the asset-backed model.
The so-called direct issuance model can be simply understood as a relatively straightforward ICO, generally where the asset owner also acts as the issuer, using blockchain as a bookkeeping tool to register the asset while issuing corresponding tokens. This model is currently more commonly used on overseas grassroots RWA platforms. Since the 2017 announcement by the People's Bank of China and six other departments clearly defined ICO activities as "unauthorized illegal public financing," this model has basically disappeared within our country.
On the other hand, the asset-backed model has gradually become the mainstream choice for compliant (mainly in Hong Kong) RWA project issuance. Essentially, this issuance plan borrows heavily from the concept of "asset securitization" in traditional finance. Although it also requires ICO to issue tokens, these tokens can actually be viewed as a new security that represents the economic rights of the underlying assets. In practice, the asset issuer will register the underlying assets in a system outside of the blockchain, and after a third party purchases the assets, a traditional licensed custodian will be introduced to manage the underlying assets, with the issuer conducting the ICO according to the corresponding ratio.
Overall, the asset-backed model has higher compliance than the direct issuance model and aligns better with the regulatory thinking in Hong Kong. However, the issuance costs are also higher, making it more suitable for larger-scale underlying assets.
03 Selection of Issuance Regions
Currently, the RWA sector is flourishing and "wildly" growing worldwide. Except for a few countries and jurisdictions like ours that impose strict regulatory measures on crypto assets, many RWA projects are rapidly developing, with various methods and platforms for issuance.
Based on our practical experience, the Xiao Za team believes that for mainland Chinese companies looking to combine their quality products with the crypto world for financing, the preferred RWA issuance region remains Hong Kong. This is based on two considerations.
First, the Hong Kong Monetary Authority has established the Ensemble sandbox, which aims to explore the establishment of innovative financial market infrastructure based on blockchain platforms. The issuance of tokenized assets and the technical interoperability between tokenized deposits and wCBDC are key testing areas for the sandbox projects. Therefore, good RWA projects are likely to shine in the sandbox.
Second, several mainland companies have already had successful issuance experiences in Hong Kong, and the regulatory norms of the Ensemble sandbox are relatively clear. If compliance requirements can be met, the possibility of conducting RWA in Hong Kong is high. Moreover, the financing scale of RWA has already reached the hundred million level, almost equivalent to a small IPO, and the financing benefits that issuing RWA can bring to clients are significant.
Considering these advantages, in the absence of a regulatory sandbox for RWA and with ICO activities explicitly prohibited in our country, going to Hong Kong for RWA may be the optimal solution for our enterprises.
04 Final Thoughts
The Xiao Za team reminds that the construction of the Hong Kong capital market is relatively mature, which requires mainland Chinese enterprises to comply with Hong Kong's financial regulatory requirements when pursuing RWA. The issuance costs of RWA naturally include the due diligence requirements of traditional asset securitization: professional lawyers, accountants, etc., need to conduct due diligence on the underlying assets to confirm the clarity and compliance of asset ownership, ensure the anchoring of on-chain data to real assets, and the compliance of smart contracts, among other things.
In summary, the Xiao Za team believes that RWA will gradually become a robust financial tool in the future, providing enterprises with a newer and more effective financing channel. However, there are currently many operations that appear to be scams disguised as RWA. For example, the Xiao Za team once received an inquiry from a client claiming to have more than ten genuine "Ruyao" pieces, wanting to use them as underlying assets to issue RWA… Therefore, partners should remain vigilant, avoid blind investments, and be cautious of scams.
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