Written by: Bai Zhen, Mankun Law Firm

We are living in a time when digital innovation and environmental protection are increasingly shaping global industries. The intersection of tokenization and real-world assets (RWA) is receiving growing attention. Tokenization—the process of converting physical assets into digital tokens on the blockchain—is changing the way assets are bought, sold, and traded. Among the various real-world assets suitable for tokenization, rare earth minerals occupy a unique and critical position. These minerals are key components of clean energy technologies and modern electronic products. However, they also raise significant environmental, social, and governance (ESG) issues.

This article explores how tokenization is revolutionizing the handling of real-world assets, with a particular focus on rare earth minerals. As industries strive to meet ESG benchmarks, the tokenization of these minerals presents an opportunity to enhance supply chain transparency, efficiency, and accountability. However, the adoption of tokenization also introduces complex legal challenges that must be addressed to ensure compliance with evolving regulatory standards.

RWA and Tokenization

Definition of RWA

RWA refers to tangible, physical assets that exist in the global economy and play a vital role across various industries. RWAs can include commodities like gold, silver, and oil, properties like real estate, and natural resources and minerals like rare earth elements. These assets are foundational to industrial processes, technological advancements, and even national security. For example, rare earth minerals like lithium and cobalt are essential for producing electronic products, electric vehicles, and renewable energy technologies such as solar panels and wind turbines.

The importance of real-world assets in the global economy is undeniable. They serve as a means of storing value, are used in production processes, and impact the supply chains of key industries. These assets are also constrained by supply and demand fluctuations, geopolitical risks, and environmental issues, further underscoring their significance. As businesses and investors seek to optimize the use of real-world assets, the concept of tokenization has emerged as a solution to enhance the liquidity, transparency, and accessibility of these otherwise illiquid and hard-to-trade assets.

Tokenization of RWA

The tokenization of real-world assets refers to the process of creating a digital representation of physical assets. This involves breaking down the ownership of real-world assets into shares, with each share represented by a token. These tokens can be bought, sold, or transferred on digital platforms. The underlying technology driving RWA tokenization is primarily blockchain. Blockchain-based smart contracts execute ownership, transfer rights, and compliance rules in an immutable and transparent manner.

Key technological aspects of RWA tokenization include:

• Asset Representation

Real-world assets are converted into digital tokens, typically following standards such as ERC-20 (for fungible tokens) or ERC-721/ERC-1155 (for non-fungible tokens), which serve as certificates of ownership, allowing the valuation of assets to be divided and traded more easily than physical assets.

• Smart Contracts

Smart contracts are deployed to automate processes related to tokens, such as compliance checks, dividend distributions, and ownership transfers. These contracts encode regulatory rules, including KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements, to ensure that token transactions comply with local and international legal frameworks. Importantly, these contracts are self-executing, meaning that once certain conditions are met (e.g., buyer verification or payment), the tokens are automatically transferred to the new owner.

• Custody and Settlement

RWA tokenization introduces unique challenges in custody and settlement. Physical assets cannot be transferred directly like digital assets, so custodians—a trusted third party—are typically required to hold the underlying assets. These custodians issue digital tokens representing ownership, and smart contracts manage the relationship between token ownership and the actual physical assets. Settlement can occur instantly on-chain, but off-chain processes (e.g., physical asset transfers) often introduce delays and require legal coordination.

• Liquidity and Market Infrastructure

Tokenization unlocks the liquidity of traditionally illiquid assets by enabling fractional ownership of assets. Investors can purchase small portions of large assets, democratizing investment opportunities. Decentralized exchanges (DEX) and centralized exchanges (CEX) integrate with blockchain networks to allow seamless secondary trading of these tokens. However, market fragmentation, lack of standardized regulation, and the absence of technical interoperability between blockchain networks may affect liquidity.

• Compliance and Regulation

One of the key technological challenges of tokenizing RWA is ensuring regulatory compliance across jurisdictions. Depending on the type of asset and jurisdiction, tokenized assets may be classified as securities (e.g., under the Howey Test by the U.S. Securities and Exchange Commission). To comply with global regulatory requirements, including those related to securities laws, AML/KYC processes are directly integrated into the blockchain infrastructure. This is achieved through identity verification services that allow for compliant transactions while maintaining the decentralized advantages of blockchain.

• Data Integrity and Security

Tokenization relies on accurate and tamper-proof data that links physical assets to their digital representations. Oracles—third-party services that connect blockchain systems to off-chain data—are often used to ensure that the status of assets (e.g., property ownership or commodity prices) is accurately reflected on-chain. Data security and integrity remain critical issues, as any vulnerabilities could lead to erroneous or fraudulent token issuance.

• Interoperability and Scalability

One of the technical challenges of tokenizing RWA is ensuring that different blockchain platforms (both public and private) can interact seamlessly. Cross-chain solutions, including atomic swaps and bridging, are often required to allow tokens to be traded or used across multiple blockchain ecosystems. Additionally, scalability issues of blockchain networks must be addressed to handle transaction volumes associated with fractional assets and high-frequency trading.

As blockchain infrastructure matures, RWA tokenization is expected to expand, particularly in sectors such as real estate, commodities, and art. Advances in Layer 2 solutions, zero-knowledge proofs (for enhanced privacy), and cross-chain interoperability have the potential to address many existing bottlenecks, facilitating greater adoption of RWA tokenization in global financial markets. Cross-jurisdictional regulatory coordination will also be key to achieving secure and compliant large-scale RWA tokenization.

Rare Earth Minerals

What are Rare Earth Minerals?

Rare earth minerals, commonly referred to as rare earth elements (REEs), rare earth metals, or lanthanides, are a group of 17 metals that are essential to modern technology. The term "lanthanide" is derived from the Greek word "lanthanein" (λανθάνειν), meaning "to be hidden" or "to escape notice." This name was chosen because the first element in the series, lanthanum (La), was initially difficult to separate and identify due to its chemical similarity to other elements. The suffix "-ide" is often used in chemistry to refer to a group or family of elements, in this case referring to the 15 elements in the lanthanide series, from lanthanum (La) to lutetium (Lu). These elements tend to have similar properties, particularly their reactivity and occurrence in nature, which led to their "hidden" nature in early scientific discoveries.

Despite the mention of "rare," these elements are not particularly scarce in the Earth's crust, but they are often dispersed and found in low concentrations, making extraction challenging and costly. Rare earth elements are crucial for everything from smartphones and electric vehicles to wind turbines and medical devices, serving as key components in batteries, magnets, and various electronic products. The rare earth element group includes 15 lanthanides, as well as scandium and yttrium, which are often classified alongside lanthanides due to their similar properties. These metals share common characteristics of luster, silvery-white color, and reactivity, especially at high temperatures. Their ability to interact with other elements makes them valuable in producing powerful magnets, lasers, and catalytic converters.

One reason rare earth elements are critical in technology is their unique magnetic, optical, and catalytic properties. For example, neodymium is widely used in the powerful permanent magnets found in wind turbines and electric motors, while europium plays a crucial role in the red phosphors used in LED screens and lighting. Although these elements are not scarce, effectively mining them remains difficult due to their dispersed distribution and the need to process large amounts of ore. As technology advances, the demand for rare earth elements continues to grow, particularly in the context of green energy and electric vehicles. The scarcity of concentrated deposits and the environmental costs of extraction make the supply chain of rare earth elements a critical issue for many industries.

Environmental and Social Impacts

The mining of rare earth minerals is essential for many modern technologies, such as electric vehicles (EVs), wind turbines, and consumer electronics. However, it also brings significant environmental and social issues. The primary environmental concern is the release of toxic waste during the mining and refining processes. Extracting rare earth minerals involves the use of hazardous chemicals, such as sulfuric acid, which can lead to soil and water contamination. Improper disposal of tailings—the byproducts of mining—often results in radioactive waste and heavy metal pollution, harming ecosystems and posing long-term health risks to nearby communities.

Social issues are equally pressing. Many rare earth minerals come from countries with poor labor practices, where human rights violations are prevalent. Reports highlight the widespread existence of child labor, unsafe working conditions, and inadequate wages for workers. Additionally, rare earth mining can displace local communities, infringe on indigenous land rights, and lead to social unrest. Resource depletion is another key issue, as the extraction of these minerals is often unsustainable, leading to long-term scarcity and geopolitical tensions over control of critical supplies.

As investors demand accountability for the environmental and social impacts of mining activities, ESG standards are becoming increasingly relevant. Failing to address these issues can result in reputational damage, regulatory penalties, and a diminished ability to attract investment.

The Role of Tokenization in Addressing ESG Issues

Tokenization—the process of representing real-world assets on the blockchain—offers a promising solution to some of the ESG issues associated with rare earth minerals. By tokenizing rare earth minerals, a transparent, immutable record of their extraction, production, and distribution can be created. This can enhance traceability and accountability, ensuring that these minerals come from sustainable and ethical suppliers. For example, blockchain technology can verify that the minerals used in EV batteries or wind turbines are extracted with minimal environmental impact and in compliance with labor laws.

Tokenization can also facilitate sustainable investment by providing investors with more detailed information about the ESG performance of mining operations. Blockchain-based tokens can be linked to sustainability certifications, allowing investors to support companies that prioritize environmental management and social responsibility. Furthermore, tokenization enhances governance by enabling real-time audits of the supply chain. Companies, regulators, and investors can access information about the sources of minerals and their environmental impacts, promoting better decision-making and regulatory compliance.

Case Studies and Practical Applications

As early as the beginning of 2022, Reuters reported on a blockchain rare earth initiative aimed at certifying sustainable output for electric vehicles (EVs). Led by the Rare Earth Industry Association (REIA) and Circularise, the initiative to assess the sustainability of rare earths, known as the Circular System for Rare Earths (CSyARES), is part of a broader EU strategy to ensure critical minerals for its industrial sector while enhancing supply chain transparency. The system utilizes blockchain technology to track rare earth minerals from extraction to end-of-life, ensuring that sustainability claims can be verified at each stage. By using blockchain tokens or digital "passports," the process allows for the creation of a permanent, tamper-proof record that helps manufacturers demonstrate that the materials they use meet stringent environmental, social, and governance standards.

The significance of this development lies not only in its technological innovation but also in its potential to reshape the rare earth supply chain, especially as Europe and the United States seek to reduce dependence on China, which dominates the global rare earth market. By applying blockchain in this context, tokenization provides an efficient way to certify and manage commodities in industries like electric vehicle production, where consumers and stakeholders increasingly demand sustainability. This tokenization approach for commodities like rare earth minerals demonstrates how technological advancements can support ESG goals, create ripple effects in global supply chains, and encourage more responsible mining practices.

Recently, it was reported that HashKey Group has partnered with Asteroid X. The two entities will collaborate through HashKey Tokenisation to explore opportunities in the RWA space. Asteroid X, developed by Web3in Tech-Lab based in Perth, Australia, aims to tokenize high-quality mining exploration assets in Australia. The project seeks to facilitate decentralized investment and equity trading through decentralized applications. As of October 2024, Asteroid X has entered the sixth phase of its project (legal opinions), after which it plans to begin product launches, Series A financing, and ultimately initiate its security token offering/initial public offering.

Project Phases of Asteroid X

• Phase 1 - Key directors of the executive board

• Phase 2 - Founders invest AUD 200,000

• Phase 3 - Company and license registration

• Phase 4 - UI design completed

• Phase 5 - Demonstration product testing

• Phase 6 - Legal opinions

• Phase 7 - Mainnet product launch (mainnet refers to a blockchain platform where users can send and receive fully developed cryptocurrency transactions)

• Phase 8 - Start of Series A financing

• Phase 9 - Launch of STO/IPO

Regarding the efforts of global regulators to support RWA tokenization, my consulting firm has been closely monitoring the work of the Hong Kong Monetary Authority through its project portfolio sandbox. The project portfolio sandbox is a testing ground designed to explore four main themes of asset tokenization use cases:

(1) Fixed income and investment funds

(2) Liquidity management

(3) Green and sustainable finance

(4) Trade and supply chain finance

While the project portfolio sandbox does not focus specifically on RWA, the underlying technology and use cases of the project are highly relevant to RWA tokenization.

In the field of fixed income and investment funds, the project portfolio sandbox is exploring how tokenization can fractionalize traditionally illiquid assets, such as bonds or real estate-backed securities. These assets are often limited to institutional or high-net-worth investors due to high capital entry requirements and poor liquidity, which can be made more accessible through tokenization. By creating tokenized versions of these assets, the sandbox is testing how blockchain technology can enhance market participation by allowing fractional ownership, improving liquidity through secondary market trading, and potentially shortening settlement times. The goal is to leverage blockchain's capabilities to reduce the current settlement cycles (T+2 or T+3) and improve transaction efficiency and transparency.

In the area of liquidity management, the project portfolio sandbox is exploring how tokenization and blockchain technology can streamline liquidity allocation and enhance cross-border transactions. The sandbox is testing how tokenized financial instruments (such as tokenized fixed income assets or investment funds) can facilitate real-time settlement and improve liquidity for financial institutions operating in a multi-currency environment. These tests aim to enhance the speed, flexibility, and efficiency of liquidity management processes, making them more suitable for global financial markets.

In green and sustainable finance, the sandbox explores the tokenization of assets such as green bonds, carbon credits, and other environmentally related financial instruments. In this context, tokenization ensures that assets are both traceable and transparent, meeting strict ESG (Environmental, Social, and Governance) standards. The sandbox tests how blockchain can provide an immutable ledger for tracking the sources, performance, and environmental footprint of tokenized assets, ensuring they align with sustainability claims made by issuers. This framework is crucial for preventing greenwashing, as it ensures that tokenized assets comply with international environmental regulations, such as the EU's SFDR (Sustainable Finance Disclosure Regulation).

Finally, the project portfolio sandbox addresses trade and supply chain finance, where the tokenization of real-world assets (such as inventory, invoices, or bills of lading) can bring significant efficiencies to global trade. The sandbox is testing how tokenized assets can simplify cross-border transaction processes by reducing transaction costs, enabling real-time settlement, and enhancing transparency across the supply chain. By leveraging tokenization, participants in the sandbox can explore how to reduce counterparty risk, accelerate document verification processes, and provide real-time tracking of goods and payments. The combination of physical assets with digital finance is seen as a key innovation in merging traditional trade finance with blockchain technology.

Advantages and Challenges of Tokenizing Real-World Assets

Tokenization brings several advantages to real-world assets, particularly in complex supply chains and inherently scarce assets like rare earth minerals:

• Liquidity. Real-world assets, especially those like real estate or rare earth minerals, often have poor liquidity, meaning they cannot be easily sold or traded in secondary markets. Tokenization creates liquidity by allowing these assets to be digitally traded on blockchain platforms.

• Fractional Ownership. Investors can purchase shares of high-value assets, lowering the entry barrier for retail investors.

• Transparency. Blockchain technology ensures that the history and ownership of tokenized assets are transparent and verifiable, reducing the risk of fraud and increasing trust in the asset's provenance.

While the advantages are clear, several challenges must be addressed to realize the full potential of tokenization:

• Valuation and Liquidity Issues. While tokenization enhances asset liquidity, there are still issues with the accuracy of market valuations for tokenized assets, especially for rare and volatile assets like rare earth minerals.

• Legal and Regulatory Issues. The regulatory framework for tokenization is still evolving. In many jurisdictions, the classification of tokenized assets remains unclear, whether they are treated as securities or commodities, and how they should be taxed or regulated. These ambiguities hinder widespread adoption.

• Technical Challenges. Implementing tokenization on the blockchain requires robust security measures to guard against cyberattacks. Additionally, the technological infrastructure supporting large-scale tokenization, such as smart contracts and digital wallets, is still in development.

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