Wang Yang, Zhu Haokang The next step for Web3 in Hong Kong is RWA to avoid licensed to be killed.

Wang Yang, Zhu Haokang propose RWA as the next step for Web3 in Hong Kong to prevent licensing issues.

Authors: Wang Yang, Vice President of Hong Kong University of Science and Technology (University Extension), Chief Scientist of Hong Kong Web3.0 Association; Zhu Haokang, Ph.D. student in Fintech at Hong Kong Polytechnic University, founding member of RWA and Stablecoin Working Group of Hong Kong Web3.0 Association

On June 1st of this year, the official implementation of Hong Kong’s new regulations on virtual assets undoubtedly marked an important milestone in the development of Web3.0 in Hong Kong. This historically significant event strongly affirms the views expressed by Hong Kong Chief Executive Carrie Lam at the establishment ceremony of the “Hong Kong Web3.0 Association” on April 11th this year, namely the profound impact of Web3.0 on the development of financial technology, and the open attitude and firm determination of the SAR government towards it. At the same time, the Securities and Futures Commission of Hong Kong opened the application for virtual asset trading platform licenses, allowing compliant operators to provide virtual asset services to professional and retail investors. The implementation of this policy undoubtedly further promotes the development of the virtual asset industry and paves the way for the broader expansion of virtual assets and Web3.0 in Hong Kong. Despite the tightening global trend in virtual asset regulation, the SAR government has steadfastly maintained its position, and a series of strategies and actions clearly demonstrate its determination and support for the development of the virtual asset space and Web3.0, further proving the SAR government’s firm commitment.

Building a Compliant, Reasonable, and Friendly Web3 Ecosystem

However, Hong Kong’s development in the field of virtual assets and Web3 has mainly focused on compliance and licensing, rather than the construction of a vibrant ecosystem that allows licensed institutions to have a viable business plan. Although the implementation of such regulations by the Securities and Futures Commission aims to maintain order in the virtual market, this licensing system is undoubtedly a heavy burden for virtual asset companies in Hong Kong. The phrase “A license to be killed” is more appropriate here, as currently, licensed exchanges like OSL suffer multi-million-dollar losses every year after obtaining licenses. Therefore, Hong Kong urgently needs a broader vision to build the world’s first compliant, reasonable, and friendly Web3 ecosystem, truly leading the development of Web3 globally.

• Circle’s hope in the front line Breaking the dilemma of declining USDC supply in the era of rising interest rates
• Brazilian parliamentary committee recommends prosecuting Zhao Changpeng and other Binance executives.
• AMM Triangle Liquidity Providers, Options, and AMM Translation

I firmly believe that in Hong Kong’s path of Web3.0 development, the next step should focus on the deep integration of virtual and real-world assets. We can make full use of blockchain technology, based on the Hong Kong dollar stablecoin, to build a powerful Web3 ecosystem. Our focus should be on the digitization and tokenization of real-world assets (Real World Assets, abbreviated as “RWA”), such as bonds, private credit, trade finance, real estate, carbon credits, and precious metals. These series of actions will greatly promote the close integration of the virtual economy and physical assets. In fact, the tokenization of RWA is not only the greatest potential for the development of Web3 in Hong Kong, but also the future trend of Web3 worldwide.

In a favorable regulatory environment, RWA can provide a truly prosperous development opportunity for legitimate participants, rather than just becoming a sacrificial victim of “licensed killing”. This transformation will undoubtedly lead Hong Kong to the forefront of global Web3 development.

The tokenization of RWA, the conversion of tangible or intangible assets into digital tokens, is a breakthrough transformation in the field of digital assets, which is expected to redefine the market landscape. The introduction of blockchain technology has revolutionized RWA compared to traditional securitization. The tokenization of RWA has transparency and security, and expands liquidity by realizing partial ownership. This approach not only solves the problem of inefficiency in the traditional financial system, but also breaks the limitations of the traditional financial system, enabling assets to be digitized and unique, shortening the distance between traditional and new finance, meeting users’ personalized financial needs, and reducing investment thresholds. This will stimulate more small and medium-sized investors to enter and participate in financial activities, thereby creating huge value and returns. At the same time, RWA injects liquidity and diversity into the real economy by expanding the types and sizes of assets.

In addition, RWA based on the Hong Kong dollar stablecoin also has an extra layer of security, which allows traditional finance and the real economy to enjoy the advantages of liquidity, transparency, innovation brought by blockchain technology, while protecting the fund security of investors and participants. In September 2022, a study by the Boston Consulting Group (BCG) predicted that the size of tokenization of real-world assets will reach 16 trillion US dollars by 2030. Correspondingly, Citibank released a 162-page research report in March 2023, comprehensively analyzing the path to achieve one billion users and digital assets reaching trillions of dollars in scale in Web3. Citibank predicts that by 2030, there will be 4 to 5 trillion US dollars of assets tokenized, and the trade finance transaction volume based on blockchain technology will reach 1 trillion US dollars.

Reasonable regulation promotes the healthy development of RWA

The healthy development of the RWA ecosystem depends on reasonable regulation. However, it is not easy to build a compliant, reasonable, and friendly RWA tokenization environment, which requires the joint efforts of the government and the industry. Therefore, we propose to adopt the “RWA 2+4” advocated by the author Zhu Haokang as the starting point for feasibility studies. This methodology revolves around two types of tokens (security tokens and utility tokens) and four core elements (legal foundation, financial framework, technical tools, and data-driven) for research and practice, in order to find opportunities in challenges and promote the healthy development of RWA.

First of all, security tokens represent ownership or rights to income of assets or enterprises, and their value is usually directly related to the performance of the represented physical assets or enterprises. People who purchase these tokens usually expect to obtain returns through the appreciation of assets or distribution of income. On the other hand, utility tokens provide the right to use certain services or resources, while allowing data generated during the token process to be recorded on the blockchain. Understanding the characteristics and differences of these two tokens is crucial for correctly evaluating and investing in RWA.

Next, we need to focus on four core elements: legal regulation, financial architecture, technical support, and data application.

Law forms the foundation of RWA, determining which assets can be tokenized and the regulations that need to be complied with during the tokenization process. As a global financial center, Hong Kong has a sound legal system for securities, which gives it a unique advantage in promoting Security Token Offerings (STOs) that comply with regulations. Hong Kong’s securities laws comprehensively regulate the issuance and circulation of various securities assets such as stocks and bonds. Financial assets that RWA needs to tokenize, such as stocks, bonds, and funds, have clear legal definitions in the Hong Kong market. In addition, the Securities and Futures Commission of Hong Kong has established comprehensive standards for the review and listing of securities issuances. RWAs conducting STOs need to be tied to assets such as corporate equities and debts, and these underlying assets need to comply with the Securities and Futures Commission’s disclosure and approval regulations to ensure their quality. Furthermore, Hong Kong has also established a strict suitability management system for investors to prevent ordinary investors from purchasing complex and high-risk RWA products.

Finance is the framework of RWA, defining the specific structure of asset tokenization and trading, including asset valuation, auditing and confirmation, token issuance and trading, and related risk management. In terms of debt and equity financing, Hong Kong has rich experience and a world-leading scale. Hong Kong’s investment banks and audit firms can provide professional valuation and auditing services for the underlying assets of RWAs, determining the quality and ownership clarity of the assets and providing a foundation for token issuance. In addition, Hong Kong’s licensed virtual asset trading platforms can ensure the transparency and fairness of RWA token issuance and trading.

Technology is the tool of RWA, providing the technological means to achieve tokenization and trading. This includes blockchain technology, smart contract technology, oracle, cross-chain, as well as related security and privacy protection technologies. Since the announcement of the Virtual Asset Development Policy in Hong Kong on October 31, 2022, outstanding blockchain technology companies from around the world have started to actively settle in Hong Kong.

During the “2023 Shanghai Blockchain International Week – 9th Global Blockchain Summit” held on September 19, 2023, the Chief Executive Officer of Hong Kong Cyberport Management Company Limited, Raymond Cheng, stated that Cyberport now has more than 190 Web 3.0-related companies, including important underlying blockchain infrastructure companies such as zCloak, a digital identity and privacy computing infrastructure company, and Safeheron, a professional digital asset custody solution company.

Building a public chain that meets Hong Kong standards

Data is the driving force of RWA, providing important information about assets and the market to support investment decisions and market analysis. The tokenization of RWAs, as a new investment method, not only provides investors with a wider range of investment choices but also brings a wealth of data and rich information to the market, such as transaction data and user behavior data. This data forms a powerful driving force, greatly enhancing the ability of asset operators and investors to understand market dynamics, predict market trends, and manage investment risks. The application of this data will also promote the organic integration of artificial intelligence and Web3, further driving the development of technological innovation in Hong Kong.

In order to promote the development of RWA tokenization in Hong Kong, we first need to build a compliant and robust infrastructure, with blockchain technology being the core component. It not only provides a decentralized, secure, and transparent platform for assets to flow globally, but also enables the automated execution of complex financial transactions and protocols. However, due to the complexity of putting RWAs on the chain, we need to implement a strong, secure, and Hong Kong-standard compliant Know Your Customer (KYC) mechanism. Organizations such as the Hong Kong Web3.0 Association have proposed establishing a new public blockchain in Hong Kong for RWAs, with a built-in KYC mechanism. Although building a new public chain requires significant technical investment and extensive community development, it is a crucial step in promoting the development of RWAs and an important milestone in Hong Kong’s fintech innovation.

Of course, establishing a new public chain is not an overnight task. It requires a substantial amount of technical investment, including designing efficient consensus mechanisms, building robust network architecture, and developing user-friendly clients. In addition, extensive community development and management are also needed to attract and retain developers, users, and investors. We believe that as long as Hong Kong is determined to become a leader in RWAs, these challenges can be overcome quickly.

Stablecoins are another essential infrastructure for RWA tokenization, and their successful implementation is crucial for the development of RWAs. We must ensure their effective implementation in Hong Kong and pave the way for further development of RWAs. As a global hub for Web3.0 development and an international financial center, it is necessary for Hong Kong to issue Hong Kong Dollar Stablecoins promptly. With the rapid growth of RWAs, the demand for stablecoins is expected to increase significantly.

In our previous article “Proposing the Issuance of Hong Kong Dollar Stablecoins Backed by Foreign Reserves,” we have already proposed that Hong Kong should issue a unified Hong Kong Dollar Stablecoin (HKDG). However, when we saw Singapore’s regulatory framework for stablecoin markets, namely the Singapore Stablecoin Framework “Response to Public Consultation: Regulatory Approach to Proposed Stablecoin Activities,” we are deeply concerned that Hong Kong may adopt a similar stablecoin policy, which could have a severe negative impact on the future development of RWAs in Hong Kong. Singapore’s stablecoin policy does not provide a unified plan for the issuers and pegged currencies of stablecoins, which will inevitably lead to fragmentation and confusion in stablecoin issuance schemes. This approach is highly likely to trigger fierce competition among stablecoins, increase financial risks, hinder the formation of mature stablecoins, and even marginalize stablecoins as niche products. This practice cannot meet the large-scale demand for stablecoins in the future comprehensive development of RWAs.

Therefore, we once again strongly urge Hong Kong to launch a unified stablecoin, guided by global planning and issued by authorized institutions (which may include government, banks, insurance, funds, and other financial institutions), with a corresponding profit distribution scheme. Only in this way can we avoid market fragmentation, reduce financial risks, meet the large-scale demand for stablecoins, make Hong Kong stablecoins a mature and widely adopted financial product, lay the foundation for the healthy development of the Hong Kong RWA ecosystem, and further consolidate Hong Kong’s leading position in the global fintech field.

Actually, we don’t have much time left. The tokenization of RWA (Real-World Assets) has attracted widespread attention and has been widely applied in different industries. As part of the decentralized finance (DeFi) protocol, MakerDAO is one of the institutions that first incorporated RWA into its strategic planning. As early as 2020, MakerDAO passed a proposal to use RWA, such as tokenized real estate, as collateral, significantly expanding the issuance of DAI (MakerDAO’s stablecoin). Despite the overall situation of DeFi not being ideal in the past year, MakerDAO’s investment in RWA has continued to increase. According to statistics, as of May this year, MakerDAO’s total investment in RWA portfolios has reached 2.34 billion DAI. It is predicted that the annual income from RWA will reach as high as $71 million, which has become an important source of income for MakerDAO. In addition, the Propy platform in the United States is a typical application of real estate RWA. The platform uses blockchain technology to tokenize real estate as non-fungible tokens (NFTs), supports purchases with cryptocurrencies, and also utilizes artificial intelligence (AI) technology to improve transaction efficiency. On July 6th this year, Propy announced that the value of its platform token PRO had increased from $0.268 to $0.571, a growth of over 200%. This event strongly proves the enormous potential and value of RWA in real-world applications.

Clear regulations for RWA token issuance

Hong Kong, as an international trade port and world trade center, naturally possesses unparalleled advantages and a huge market demand in terms of geographical location and economic status. Hong Kong has the ability to lead the global RWA market, so it should seize the opportunity to quickly build an RWA business ecosystem based in Hong Kong. First, we need to clarify the regulatory policies for the securitization of RWA and the issuance of security tokens (STOs), defining the scope of assets that security tokens can be anchored to and the information disclosure requirements to protect investor rights. Establishing an RWA token issuance and trading platform on exchanges such as the Hong Kong Stock Exchange will enhance liquidity.

We should encourage banks, insurers, funds, and other financial institutions to fully utilize their expertise in participating in RWA business. At the same time, Hong Kong should strengthen cooperation with Singapore, the European Union, and other places in the field of RWA tokenization, jointly expanding the market. Through education and training, we can accumulate the professional talents required for RWA tokenization business. Building an open, standardized, and vibrant RWA tokenization business ecosystem will greatly enhance Hong Kong’s digital economy and fintech capabilities, laying a solid foundation for its future.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!