The Future of RWA: Licensed Compliance to the Right, Retail Tokens to the Left, Stock and Token Product Linkage

Original Title: "The Future of RWA: Licensed Compliance to the Right, Retail Tokens to the Left, Stock and Token Product Linkage"

Original Author: Ye Kai (WeChat/Twitter: YekaiMeta)

Background of Multipolarization

Recently, there has been a lot of buzz, whether it's the hot topics in the crypto world, such as BTC's rise and adjustment, the surge of runes and stones, and memecoins, or the discussions and traffic brought by Bitcoin ETFs; and the international situation's hot topics, such as the older Russia-Ukraine and Israel-Palestine conflicts, and the recent assassinations in Saudi Arabia and Slovakia, and the helicopter crash of the Iranian president. Entering the year 2024, a period of great chaos.

The decoupling of China and the United States has become a fact, and the international conflicts highlight the trend of multipolarization, which will inevitably lead to the decoupling and reconstruction of the international monetary system. Since internationalization has retreated to a regional multipolar strategy, digital currency will become a key link, and this must be associated and anchored with the physical world.

At the same time, more and more traditional institutions, mainly on Wall Street in the United States, are beginning to discuss the future trend of tokenization. The future trend of the physical world will be tokenization. However, this future requires a cycle, and the popularization, advocacy, education, and conversion and migration of the general public will require the emergence of true RWA. The RWA track is not only the tokenization of traditional centralized finance but also the decentralized native tokenization, and perhaps even more novel and radical approaches.

In fact, the development momentum of Bitcoin ETFs has already confirmed the direction of the RWA track, because only by connecting with financial institutions and industrial capital in the physical world can there be a scale mutation and new incremental users. At the same time, after runes and memecoins, more and more voices and opinions are pointing to the next more sustainable hot spot, which will be the RWA track.

From the ROOTDATA RWA track project list, most of the current RWA track projects still focus on the DeFi product model of traditional financial products as interest-bearing collateral assets, and there are no strictly true RWA tokenization products yet.

Figure 1 ROOTDATA's RWA Track Projects

The Future Trend of RWA in Hong Kong

Since the Hong Kong Web3 Conference in 2023 and the series of new regulations on virtual assets, especially the issuance of the 7th license for virtual asset exchanges and the promulgation of security token regulations, many people believe that Hong Kong will become the core base of RWA.

As a transformation of mainland funds, with a large number of high-quality corporate asset resources and resources such as securities firms, funds, and insurance capital, this direction is naturally very promising. Therefore, they have been paying close attention and communicating closely since last year, having close communication and project discussions with licensed brokers, asset management, exchanges, and even offshore exchanges in Hong Kong. In the end, they found that the reality is not as expected, and can only say "the ideal is full, but the reality is skinny."

We summarized a future strategy for Hong Kong RWA: "Licensed compliance to the right, retail tokens to the left, stock and token product linkage."

Licensed compliant RWA, relying on licensed exchanges, financial product tokenization, mainly focusing on debt or equity design, will be relatively conservative, and biased towards traditional financial institutions and regulatory models, mainly targeting the institutional market (2B), with moderate issuance scale but weak liquidity, representing the financing attributes of enterprises;

RWA that follows the non-licensed compliance route, relying on offshore RWA exchanges or alternative investment OTC, Swap exchanges, physical asset tokenization, will not focus on equity design, integrating native token models, avoiding traditional securities regulation, mainly targeting the retail market (2C retail investors), with flexible issuance scale, borrowing from the token economic model, pursuing liquidity, representing the investment attributes of retail investors (speculating on coins).

The success or failure of Hong Kong RWA, the core key is: how to achieve the transition from the 2B market to the 2C market?

This is not a question of whether it can be transferred, but whether traditional financial institutions and vested interest groups are willing to decentralize power and profit or be revolutionized?

Although the Web3 ecosystem in Hong Kong is currently being loudly promoted, it is still a struggle for power and profit among regulatory agencies and various traditional financial interest institutions. For example, the current Hong Kong Bitcoin spot ETF, a good RWA product as a wind vane, has been messed up, not given to licensed virtual asset exchanges but still in the traditional Hong Kong Stock Exchange, a group of old financial people dividing the cake, with no trading volume and no ecological drive.

If there is no revolution and no innovation, then Hong Kong's licensed compliant RWA products will eventually end up like this. Licensed virtual asset exchanges will only be OTC for RWA product trading and redemption, with the core still in the hands of brokers, asset management, and various institutional market interest groups.

[Principle 1] RWA product design can have more innovation. Although it is now packaged into securities products in a traditional financial way and then tokenized, it can be innovatively designed in external OTC or ATS, similar to GameFi, where the game is played in Game but the incentives are in Fi. Securities product tokenization may lack liquidity, so liquidity incentives can be done externally.

The Conservative Route of Licensed Compliance to the Right

You may not imagine the conservativeness of licensed compliant RWA (or STO) under Hong Kong regulation. Basically, everyone thinks that since the exchange licenses have been issued and the regulations have been promulgated, they can start working quickly, right?

Actually, this is not the case. Under the current premise of licensed compliance in Hong Kong, the issuance of security tokens requires the asset package to first issue a fund, which requires a 9th asset management license; then the issuance and underwriting of RWA products require a 1st brokerage license (usually brokers), and brokers need to find Hong Kong financial institutions to share the quota; RWA products are generally equity-based and must be traded on a 7th licensed exchange, and non-licensed exchanges in Hong Kong are gradually unable to operate, especially not able to list security tokens.

Many people are interested in the process of issuing RWA/STO in Hong Kong, so here is a detailed explanation for your reference.

1) As a project party, if you are an asset party or a third-party entity serving the asset party, the first step is to find a senior brokerage institution with a 1st brokerage license (the key is to have financing channels and PI resources) to discuss the design of the asset-owning enterprise and the underlying asset package, whether it is a simple or complex design. According to the regulatory guidelines of the Hong Kong Securities and Futures Commission, a simple design is debt-type, while a complex design is similar to ABS or REITs, and the latter has not yet issued specific regulatory guidelines;

2) Third-party institutions are necessary, and you need to find a law firm with Crypto business or licenses to issue legal opinions on product structure or SPV, Fund structure, etc. You also need an accounting firm to issue an asset evaluation report on the asset package. If it is an enterprise credit debt model, you also need a credit rating report from an internationally recognized rating agency;

3) According to regulatory requirements, the basic product of RWA needs to issue a fund, that is, your asset package or credit debt needs to use a 9th asset management license to issue a fund product for filing (or review). It can be a closed-end fund (filing) or an open-end fund (the difference is that an open-end fund can be publicly raised but has more regulatory requirements). If there is a series of issuance plans, you can prepare the umbrella structure of the fund when issuing. The license can be self-held. In theory, because it is an RWA physical asset (not 100% digital asset) fund, it can be a non-uplifted 9th license. If not, you need to find a 9th license asset management institution to be the investment manager. Of course, an uplifted 9th license is better, which means having Crypto experience and possibly being more recognized by regulators;

4) The process of RWA tokenization is actually the tokenization of fund products, that is, the core of security tokens is the tokenization of financial products. You need to choose a public chain platform (currently generally Ethereum) and designate a digital wallet. According to the issuance scale of the fund product, the minimum share, the minimum transaction amount, etc., the fund product is put on the chain and tokenized, and prepare the guide manual and customer service website, etc. This technical work may be the least difficu<

5) The most difficult part is the distribution in the institutional market, which tests the brokerage institution's brokerage business capabilities, whether there are mature distribution channels or PI customer groups for a series of investment products, whether there are Hong Kong financial institutions that frequently hold roadshows and cooperate for underwriting or distribution, and whether there are specific fund institutions for OTC market and bulk transactions? Remember, as I mentioned in my previous article, the essence of RWA products is corporate financing, and the essence of corporate financing is the institutional market, which requires pre-negotiated underwriting and distribution, not that the RWA product will bring money immediately after issuance. You need to seriously think: where is the money?

4 and 5 can be done simultaneously, negotiating distribution/"dirty" under the table while technically tokenizing the fund, both are OK.

6) After the fund tokenization and underwriting are negotiated, it can be listed on a licensed exchange. In fact, licensed exchanges only review the listing of tokens. Of course, exchanges often also have a 1st license,

License No. 9 and trust custody licenses, among other self-owned or partner institutions, can provide related services, including a series of transactions by distribution and underwriting institutions after listing, RWA token digital asset custody, subsequent subscription and redemption, and the exchange's RWA product investment transactions (currently limited to PI customer investments) as well as possible OTC transactions, bulk transactions, etc.

7) According to regulatory guidelines, PI investment transactions are currently prioritized. When retail market requirements are met, it can be opened to the retail market (individual investors). However, what specific requirements need to be met is not yet clear. If we compare it to the stock market or consider it from the perspective of protecting individual investors, it might be after the number of addresses holding RWA products, liquidity, market price, and net value fluctuations become relatively stable and mature, the SFC will then approve it for retail market individual trading.

8) The final step is for the exchange to open the retail secondary market for the RWA product, allowing individual investors to start trading. Only when compliant RWA products reach this stage can they be considered truly successful, but how far is it to reach this point?

The Native Model of Retail Tokens

Unlike the licensed and compliant virtual asset exchanges and the tokenization model of securities products, there is a relatively more aggressive or innovative native token model. This model is based on alternative investment regulation under common law, avoiding equity design under securities regulation, directly tokenizing physical assets or digital certificates of physical assets. Since these are non-securities tokens and are backed by physical assets, they are not unsupported tokens or memecoins. They can be traded on offshore RWA exchanges or alternative investment OTC, Swap exchanges. The issuance model draws from the token economic model, and the issuance scale can be large or small. Due to the native token model and related community traffic, it naturally has a certain liquidity, combined with the cash flow or market activity benefits supported by physical assets, to manage market value linkage.

The model of unlicensed exchanges involves more complex content such as RWA asset issuance, trading, leverage, and derivatives, liquidity, etc. We will discuss this in a separate article. Many friends ask how to design RWA products, so here we will briefly talk about the design of non-securities RWA token products.

【Principle 2】 The design of RWA products does not correspond to physical assets but focuses on the platform of the physical world, tokenizing the governance tokens or point tokens of the RW platform.

1) The core of non-securities RWA product design is not to correspond to physical assets or map the rights of physical assets. The supporting assets can be physical assets or rights, but the tokenization is not of rights but of platform-like or utility-like rights. This is quite convoluted, especially for friends without traditional asset securitization experience, particularly in issuing bonds or ABS. We can further elaborate through Space or live broadcasts in the future.

2) The native model of retail tokens focuses on the combination of non-securities RWA tokens and alternative investment exchanges, combined with Crypto Fund (early Capital and later Maker). For example, for the licensed exchange HashKey, its compliant STO/RWA products have not yet expanded in scale, but its retail token model RWA market can follow: offshore international station list + Tokenization department + Capital + Fund (Maker) RWA tokenization combination.

3) The participation of retail and institutional investors uses DAO, community, or node models to encourage more retail investors and related physical asset world industry chain ecological institutions to participate. This can be understood as a process of digitization and on-chain, or as a hedging behavior with the physical world. The 2C model does not start after listing but involves early participation from the initial community building, product discussions, and node consensus, becoming part of the consensus.

4) The stock-token linkage model was introduced in a previous article, i.e., the RWA model of linking stocks (traditional financial stocks) and tokens (virtual assets). The linkage of traditional financial stocks with virtual assets, where the stocks of listed companies are linked with virtual assets such as Bitcoin physical assets or Bitcoin spot ETFs. As the price or value of virtual assets, mainly Bitcoin, continues to rise, it drives the value of listed company stocks in the physical world to double. If the Web3 layout and Crypto investment are also related to the main business of the listed company, they can mutually enhance and pull each other up.

5) The combination of the native token model: RWA NFT + FT + memecoin, using NFT to carry the identity (or membership) and digital rights certificate of retail investors, and can become the anchor for a series of liquidity token airdrops; changing the rights or dividend ST to liquidity or some governance utility FT, becoming the functional token of the RWA application scenario, and the functional token of the incentive or mining model; combining the RWA narrative of the physical world, upgrading the brand or IP franchise combined with token media traffic to a memecoin of the RWA combination narrative, as the brand leading flag of the former NFT and FT, linking the three together.

6) The tokenization of RWA cash flow, not following the profit dividend model, but through structuring, continuously entering the liquidity pool through an SPV or smart contract, empowering structured liquidity, becoming a special Maker Fund or Liquidity swap pool, with visible expected continuous liquidity management.

7) The stock-token product linkage, an upgraded version of the stock-token linkage model in 4, i.e., adding a compliant RWA asset token issued by a listed company based on its main business or basic asset package, using the listed company's CB to purchase RWA tokens, while the RWA tokens can also be airdropped (given) stocks (physical financial assets). This combines the stocks of listed companies, virtual asset investments, and RWA token issuance, using convertible bonds to achieve partial underwriting of RWA products. The operating cash flow of the listed company is agreed upon according to corporate governance requirements to form a liquidity pool for RWA tokens, airdropping/allocating listed company stocks or options to RWA token holders, thus mutually driving value and increasing users. If there is a lot of interest in this model, we can find an opportunity to discuss it in Space or live broadcasts.

【Principle 3】 The limited and unlimited space of RWA tokenization

The principle of RWA tokens: "It is best to be useless, but it sounds useful, though generally not used."

8) Thoughts on related RWA assets

From the perspective of usefulness and limited/unlimited, what are the relatively high-quality and suitable RWA assets?

First, real estate can clearly no longer be considered a good RWA asset category. Currently, combining the unlimited imagination space of assets and the characteristics of self-generated traffic and operational cash flow, we are more focused on the following asset categories:

- Digital certificates of bulk commodities with financial attributes, such as durian, agarwood, etc.

- AI computing power, especially distributed computing power and edge computing combined with #DePIN

- Green energy, the photovoltaic storage and charging ecosystem combined with #DePIN and carbon credits

- The Fans ecosystem of music and sports, from the perspective of streaming payments and idol economy

- New content platform models, mainly IP Franchise and content distribution of cultural films and television, Watch2Earn, etc.

In summary, the future of RWA is very promising and may not be limited to the few models discussed above. Due to the length of the article, we cannot elaborate in detail. We can discuss it in detail through Space or live broadcasts in the future. However, whether it is the RWA products of licensed compliant exchanges, the RWA tokens of alternative investment exchanges, or the combination with listed companies, the essence is still to follow the most energetic assets, funds, and people. Comparing the data and development of Bitcoin spot ETFs, you might understand why RWA will be the next more sustainable and long-term hot track?!

This article is a submission and does not represent the views of BlockBeats.

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