Why has RWA been gaining popularity recently and yet showing a trend of being overwhelming?

For over a month now, it has mainly been participating in various organizational meetings and project implementations. RWAs are becoming increasingly popular. Recently, in terms of compliance RWAs in Hong Kong, several events in Shanghai and Hong Kong regarding FinTech, RWA has been a hot topic. Internationally, at the November Singapore FinTech and the September Singapore Token2049 events, discussions on RWA-related regulatory policies and projects were also hot topics. Looking ahead, in December, the FinTech event in Abu Dhabi and Dubai Blockchain Week are scheduled, and RWA is expected to be a focal point of attention.

Major exchanges are also following suit. OKX’s top star continuously tweeted to emphasize RWA and stablecoins, Bybit launched cryptocurrency investment products linked to global stock indices, and after Binance’s strong promotion of the RWA concept project MANTRA, it introduced its flagship project, Usual. Moreover, Matrixport, led by Xiaohan Zhou, also launched a gold RWA product on its new platform, Matrixdock, following its short-term US Treasury bond RWA product.

Compared to two years ago when no one paid attention to RWA, now everyone is coming out to talk about RWA.

Examining the compliant RWA market in Hong Kong, with the increasing attention in the mainland market, the compliant market has heated up somewhat like an offshore market. Currently, in Hong Kong’s compliant RWA market, issuance is primarily done through the traditional debt form for fund registration, followed by private placement and tokenization. It has not yet progressed to listing on licensed exchanges and serving professional investor (PI) clients. The secondary market for retail individual investors is still quite distant, and the existing regulations are either inadequate to support or lack clear guidance. In other words, the current compliant RWA market in Hong Kong is still in the private placement issuance stage, without a primary and secondary market for RWAs. However, with the maturing of regulations and advancements, it will gradually progress to listing and PI transactions and may potentially cautiously open up the secondary market in the future.

But some recent voices are worth reflecting on.

One notable voice is from the Hong Kong FinTech sector, where around the RWA hotspot, the mainstream discussion surprisingly revolves around consortium blockchains. Wall Street institutions that heavily promoted R3 consortium blockchains a few years ago are now utilizing Ethereum, Polygon, Base, and other public chains or Layer 2 solutions for tokenized funds. However, in Hong Kong, RWA is now being predominantly promoted on consortium blockchains? This is a clear signal of regression!

When looking at the RWA scene in Hong Kong again, currently, although it is only private placement, it has not truly realized the on-chain assets and industrial scenarios brought about by RWA tokenization. It also does not consider the secondary market and Layer 2 derivative applications. Instead, it is excessively financialized, highlighting private placement and its linkage with the stock market, which means neither emphasizes 2.5, almost like regressing to 2.0?

Furthermore, RWA stablecoins in FinTech are also a hot topic. Two Hong Kong institutions planning to issue stablecoins have also received a lot of attention. However, Bitcoin is on the verge of becoming a reserve asset for the United States and many other countries globally, while Hong Kong’s stablecoin framework can only use the Hong Kong Dollar as the reserve asset. Where are its application scenarios and the value of resilience against economic cycles and inflation?

One is mainland Shanghai, with the Bund Summit in September and the Digital Asset Summit in November. At the Digital Asset Summit a few days ago, the so-called first domestic RWA project—the “Malu Grape RWA” project was launched, which is simply using non-standard agricultural product grapes, with its underlying assets being the digital agricultural planting and/or sales data, pledging the equity of an agricultural company, following the old routine of a property rights exchange/financial exchange, cloaked in the guise of RWA. It is unclear whether it will adopt the Hong Kong Fund structure or directly list and trade assets on the mainland’s digital asset exchange?

Current Situation of the Hong Kong RWA Market

The development of the compliant RWA market in Hong Kong primarily depends on the attitudes of three parties: one is the HKMA, with Chief Executive Auyeung and a group of banking juniors actively promoting sandbox projects; the second is the SFC, with Chairman Leung’s style being relatively steady and conservative, overseeing the regulation of RWA/STO tokenized securities relatively slowly; and the third is the HKEX, where the new CEO, Ms. Chan, in March, placed great emphasis on virtual assets, successfully launching a virtual asset ETF on the HKEX, rather than it being with the virtual asset exchange where the virtual asset trading index should have been.

The HKMA’s Ensemble sandbox project focuses on four RWA themes: fixed income and investment funds, liquidity management, green and sustainable finance, and trade and supply chain financing.

As the first RWA project, the Langxun Technologies electric vehicle charging pile cross-border RWA financing project is the pilot project in the sandbox project. This project is a mainland listed company achieving cross-border financing in Hong Kong through RWA form. After its issuance at the end of August, Langxun Technologies’ GEM market value increased by 1 billion, followed by the general surge of the A-share market at the end of September, and ultimately, after a few months, its market value increased by tens of billions. This pilot project has promoted the mainland market’s understanding and demand for RWA, stimulating the originally gradual RWA projects in Hong Kong to accelerate suddenly. Various licensed institutions have started to consider issuance as a KPI, disregarding the primary and secondary markets afterwards—whether to be listed on a licensed exchange, whether there is a PI in the primary market, when to open the retail market—none of these are considered, just issue first and then figure it out, and first coordinate with the R shares before figuring it out.

The Hong Kong Monetary Authority is also actively promoting tokenization of deposits and cross-border payments. In fact, in recent years, financial institutions in the US and Europe, as well as international clearing institutions, have been continuously experimenting with and implementing commercial bank deposit tokenization and cross-border payment tokenization. The sandbox direction of the Hong Kong Monetary Authority is also aligned with this trend, given the many banks under its purview. However, the key issue is that Hong Kong no longer holds a distinct position in the Western financial system. Blindly following a strategy of imitation is meaningless; what Hong Kong needs is reform and innovation based on its own new positioning.

The Focus is on Onshore Asset RWA Financing Pathway

Hong Kong’s core advantage remains its role as a super-intermediary between onshore Chinese assets/funds and offshore funds.

From this perspective, the key for Hong Kong is to promote cross-border RWA financing of high-quality onshore assets, rather than focusing on cross-border payments, as the sharp decline in exports over the past two years is an undeniable fact. For Hong Kong’s RWA, the core lies in onshore RA/FA assets, including onshore institutional clients and funds (especially onshore institutions’ Hong Kong branches), as well as overseas funds or assets. Onshore institutions should continue to promote RWA asset investment and financing to overseas funds through Hong Kong’s new RWA channels. Apart from new energy and infrastructure, there are plenty of consumer assets or equities, new materials assets or equities, which are targets of interest for overseas funds or capital. In situations where normal investment is not possible, investment and profitable exits can be made through Hong Kong’s compliant exchanges and RWA financial products.

In mainland China, we use “controlled assets, trusted asset management” to explain RWA.

Many people often ask upfront: Can my asset be tokenized as RWA? What kind of asset is suitable for RWA issuance?

One misconception is about the asset itself, and another is assuming that once it is tokenized as RWA, funds will automatically flow in. The elements of RWA are quite complex, including market structure, market participants (2B and 2C), native tokens, and liquidity. The market structure includes asset side, fund side, market participants, whether they are Hodlers or traders, investors, speculators, arbitrageurs, and even the conversion issue between institutions and retail investors. The issuance process of Hong Kong’s RWA involves funds, brokerages, exchange listing, underwriting, market making, as well as liquidity, information disclosure, redemption, and settlement, making it a relatively specialized market.

Of course, most Chinese people’s favorite question is: Are there any successful cases? In the early stages, every RWA case is innovative, and compliant RWA has a long cycle. If you wait until a year later for a successful case to go live on the secondary market, you would have missed your opportunity long before then.

From this perspective, several questions need to be asked: Where are the assets? Where are the funds? Where is the liquidity?

Supporting Real-World Assets (RWA) issuance without considering transaction and liquidity is irresponsible.

Compliant RWA takes the form of a financial product as a shell, tokenized through a Fund, essentially still involving high-quality asset-backed or cash flow-based corporate financing. Since scaled assets reside in the hands of companies or on a company’s platform, the RWA market will inevitably begin with institutional markets before reaching retail markets.

In the early-stage compliant RWA market, it requires a guiding framework, guiding funds, multi-layered infrastructure frameworks, and diverse market participants. This includes not only project-backed funding but also liquidity providers, arbitrage investment funds, etc., necessitating a framework and fund guidance.

The Hong Kong RWA is like the Hong Kong Stock Exchange of twenty years ago and can be considered the “Hong Kong Stock” of the cryptocurrency era. It represents high-quality Mainland assets listed in Hong Kong, leveraging Hong Kong’s legal and financial professional talent and resources, utilizing red-chip structures such as SPVs, and facilitating global capital flow. Therefore, we and our partners have jointly submitted a proposal for a Crypto Hong Kong Stock to the Hong Kong Stock Exchange, hoping to promote the design and implementation of a “Crypto Board” on the Main Board and GEM Board. Crypto Hong Kong Stock is more borderless and retail-oriented but fundamentally remains focused on corporate financing and institutional markets.

Therefore, traditional finance should not worry; it is not about overturning what you are familiar with but rather refreshing its form. It requires embracing Web3.0 and virtual asset cryptocurrencies. RWA may be the transformation path for Central Hong Kong finance professionals.

What About Liquidity?

Compliant RWAs are not limited to the Hong Kong compliant RWA route; there can also be licensed compliant Singapore STO models, using a Fund/SPV + Non-Securities offshore mode, the SEC-compliant ATS model (US RWA model), etc.

This way, one can leverage the international interoperability and mutual recognition of financial products and cross-border regulatory arbitrage design liquidity. Viewing Hong Kong’s RWA private placement or primary issuance as tokenized US Treasury bonds, with pledging and secondary markets on regulated exchanges in Singapore or Dubai, and the secondary layer of native token movement on offshore exchanges. This is a cross-border ATS arbitrage model, which will be elaborated further.

The native token is the core incentive mechanism of RWA. In fact, the tokenization of traditional financial products into RWA tokens is equivalent to a 2.5 securities token, not a native token. Within the RWA ecosystem, tokens based on RWA underlying asset collateralization or generated for RWA asset governance are the true native tokens. This is where liquidity’s key lies.

The issue of liquidity, which is also the strength of practitioners in Hong Kong Central, Maker, market maker, 50% off party, Middle Eastern fund manager, and so on, various liquidity measures, in fact, have the same goal, just the asset targets have changed from stocks to RWA products.

Another key to liquidity is the exchange.

Licensed exchanges in Hong Kong, conservative and stable, suitable for the primary market and compliant fund transfers; licensed exchanges in Singapore, emphasizing issuance and underwriting, suitable for the primary market and partial secondary market; licensed exchanges in Dubai, focus on the secondary market, as well as linkage with offshore cryptocurrency exchanges.

RWA liquidity will provide a huge market opportunity for vertical exchanges, that is, RWA exchanges. A good RWA asset, with scale and depth, will inevitably be based on a good industry track, and the RWA upgrade of this industry track will support a vertical industry RWA exchange, such as the gold industry track, with gold industry chain’s gold mine asset RWA, physical gold RWA, gold trade and supply chain finance RWA, gold lending DeFi, gold industry chain’s payment settlement PayFI, gold stablecoin, and so on.

The opportunity is huge, but it also needs to be seized. Top exchanges have already started focusing on RWA, and I am more optimistic about a licensed exchange platform with RWA as the theme.

The significance of an RWA licensed exchange may be epoch-making. From the perspective of corporate financing, different eras correspond to different exchanges: NYSE corresponds to traditional enterprises, Nasdaq corresponds to Internet high-tech, because NYSE’s valuation method, pricing strategy, PE multiple, and trading system are difficult to reflect the value of Internet high-tech, Nasdaq was created; and the RWA exchange corresponds to emerging assets and virtual assets, Nasdaq also finds it difficult to provide appropriate or rational valuation and trading systems for carbon assets, virtual assets, etc., so the RWA exchange will inevitably become an exchange of a new era.

Finally, I think of a term: Skirting. During this period, there has been a debate online about whether skirting around the edge in relation to a former female gymnastics Olympic champion and world champion is a freedom issue or a suppression issue?

Looking back at the current momentum of RWA, in the early stage of development, we must be cautious not to flood and lead to Gresham’s Law, and also protect those well-intentioned but skirting RWA promoters. We are willing to continue steadily forward with everyone, issuing voices of moderation, compromise, and compliance professionalism to guide and promote the development of the 2.5 model of RWA.

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