As traditional finance increasingly intersects with blockchain technology and crypto assets, RWA is emerging as an alternative or even a superior solution to traditional financial instruments such as asset securitization and IPOs, bringing new ideas and methods for asset circulation and trading.

Simply put, the basic process for compliantly issuing an RWA project is as follows: selecting suitable assets ➡ determining the issuance plan ➡ asset evaluation and audit ➡ building a tokenization platform and issuing tokens ➡ obtaining regulatory approval for compliant issuance.

Today, the Sa Jie team, drawing from practical experience and the latest successful RWA cases, will discuss this fascinating topic from three perspectives: the selection of underlying assets, the choice of issuance plans, and the selection of issuance regions

01 The Selection of Underlying Assets—The “Lifeline” of RWA

From the practical experience of the Sa Jie team, the most critical factor in issuing an RWA project at this stage is learning how to correctly select the underlying assets for issuance.

Indeed, crypto assets are becoming an essential tool in reshaping the global financial landscape.

However, due to the limitations of our understanding and the differences in national conditions across countries, the development and adoption of new things, especially those with financial attributes, must go through a slow process. This results in varying levels of acceptance of crypto assets across different countries and jurisdictions.

Therefore, selecting the right underlying asset is essential. On one hand, it helps provide an RWA project with a more reasonable, reliable, and visualized “value.” On the other hand, it also increases the chances of the project being recognized by regulators as a legitimate “financial innovation” rather than an illegal fundraising or financial fraud scheme.

Looking at several successful RWA projects in China that have gained significant attention and compliance recognition, the selection of underlying assets generally shares the following characteristics:

(1) Physical assets

(2) Green economy attributes

(3) Ability to generate stable cash flow

(4) Moderate overall asset value with long-term stable market prices

It is worth noting that the reason why many underlying assets have “green economy” attributes is mainly because most domestic companies choose Hong Kong as the destination for issuing RWA projects. These projects achieve compliance through the Ensemble sandbox launched by the Hong Kong Monetary Authority. Currently, the first phase of the Ensemble sandbox experiment focuses on the tokenization of traditional financial assets and real-world assets, emphasizing four key themes: (1) fixed income and investment funds, (2) liquidity management, (3) green and sustainable finance, and (4) trade and supply chain financing.

Among these themes, green and sustainable finance is the most accessible category for mainland enterprises to secure approval while also achieving financing benefits. This is why the two successful projects currently seen in the market—a certain new group’s charging stations and a certain Xin Technology’s photovoltaic power station—both fall under this category.

Of course, as the overall market evolves and overseas RWA platform opportunities increase, the Sa Jie team believes that while the “green economy” will continue to be an important consideration when selecting underlying assets, it will not be the decisive factor. After all, the essence of an underlying asset is to serve as the core value foundation of an RWA project. The key lies in whether it can generate stable cash flow and achieve high market recognition.

02 The Choice of Issuance Model

Based on current market practices, RWA mainly adopts two issuance models: the direct issuance model and the asset-backed model.

The direct issuance model can be simply understood as a relatively straightforward ICO. In this model, the asset owner also serves as the issuer, using blockchain as a bookkeeping tool to register the asset while simultaneously issuing corresponding tokens. This model is more commonly used on overseas private RWA platforms. However, since China’s 2017 “Announcement on Preventing Token Issuance and Financing Risks” (9.4 Announcement) by the People’s Bank of China and six other departments explicitly defined ICOs as “unauthorized and illegal public financing activities,” this model has essentially disappeared from the domestic market.

The asset-backed model, on the other hand, has gradually become the mainstream choice for compliant RWA issuance, particularly in Hong Kong. This model heavily draws from the concept of “asset securitization” in traditional finance. Although it still involves ICOs for token issuance, these tokens can essentially be regarded as new securities representing the economic rights of the underlying assets. In practice, the asset issuer registers the underlying asset in an off-chain system. A third party then purchases the asset, introduces a licensed custodian institution to hold it, and the issuer conducts the ICO based on a corresponding ratio.

Overall, the asset-backed model offers higher compliance than the direct issuance model and aligns better with Hong Kong’s regulatory approach. However, it also comes with higher issuance costs, making it more suitable for larger-scale underlying assets.

03 The Choice of Issuance Region

Currently, the global RWA sector is in a period of rapid expansion and unregulated growth. Except for a few countries and jurisdictions like China that impose strict regulations on crypto assets, a large number of RWA projects are developing rapidly, with diverse issuance methods and platforms.

Based on our practical experience, the Sa Jie team believes that for mainland Chinese companies looking to integrate their high-quality products with the crypto world for financing, Hong Kong remains the preferred issuance region for RWA. This preference is based on two key considerations.

First, the Hong Kong Monetary Authority has established the Ensemble sandbox, designed to explore the development of innovative financial market infrastructure based on blockchain platforms. The issuance of tokenized assets, as well as the technical interoperability between tokenized deposits and wCBDC, are key testing areas in the sandbox project. This means that high-quality RWA projects have a strong chance of standing out within the sandbox framework.

Second, several mainland companies have already successfully issued RWA projects in Hong Kong, and the regulatory framework within the Ensemble sandbox is becoming increasingly clear. As long as compliance requirements are met, the likelihood of launching RWA projects in Hong Kong is relatively high. Additionally, RWA financing has already reached the billion-yuan level, making it comparable to a small IPO. The financing benefits of issuing RWA can be significant for companies.

Considering these advantages, given that China has yet to establish an RWA regulatory sandbox and ICOs remain explicitly prohibited, issuing RWA in Hong Kong appears to be the best option for Chinese enterprises.

04 Final Thoughts

The Sa Jie team reminds that Hong Kong’s capital market is well-developed, which means that mainland Chinese enterprises seeking to issue RWA in Hong Kong must comply with its financial regulatory requirements. The issuance cost of RWA naturally includes the due diligence requirements of traditional asset securitization. This involves professional lawyers, accountants, and other experts conducting due diligence on the underlying assets to ensure clear and compliant ownership, verify that on-chain data is properly anchored to real-world assets, and confirm the compliance of smart contracts.

Overall, the Sa Jie team believes that RWA will gradually grow into a robust financial tool, offering businesses a newer and more efficient financing channel. However, the market has also seen many scams disguised as RWA projects. For example, the Sa Jie team once received a consultation from a client claiming to possess more than ten authentic “Ru Kiln” ceramics and wanting to use them as underlying assets for an RWA issuance… So, we advise everyone to stay vigilant, avoid blind investments, and be cautious of potential fraud.

Statement:

This article is reproduced from [WeChat public account:Xiao Sa’s legal team], the copyright belongs to the original author [Xiao Sa lawyer ], if you have any objection to the reprint, please contact Gate Learn Team, the team will handle it as soon as possible according to relevant procedures.

Disclaimer: The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice.

Other language versions of the article are translated by the Gate Learn team, not mentioned in Gate.io, the translated article may not be reproduced, distributed or plagiarized.