Guide to Selecting Underlying Assets for Real Asset Tokenization Projects

Recently, there has been a surge in consultation demand within the industry for the tokenization of physical assets ( RWA ) projects, involving a wide variety of underlying asset types, including agricultural products, real estate, precious metals, and even some purely conceptual projects.

In fact, under the current regulatory environment, aside from RWA projects that have passed the Hong Kong regulatory sandbox review and are issued under regulation, other types of RWA projects carry a relatively high risk, especially those issued to residents of mainland China.

This article aims to clarify which mainland assets can be used in the Hong Kong sandbox and which cannot, to help industry practitioners conduct business more effectively.

Restrictions and Criteria for Judging Mainland Assets as RWA

First, it is necessary to clarify that assets located in mainland China and mainly operated for mainland residents can be used for RWA, which has been confirmed by previous successful cases.

However, there are indeed some limitations to issuing RWA of mainland assets in the Hong Kong sandbox. Based on practical experience, the following three types of assets are not suitable for RWA:

1. Assets that do not comply with the legal regulations of the Hong Kong region
2. Assets that do not comply with mainland legal regulations
3. It is not suitable to issue assets in Hong Kong at the current stage.

Onshore assets issued as RWA in Hong Kong must comply with the "dual compliance principle".

As the assets are located in the mainland, but the tokenized assets are sold and operated in Hong Kong, the entire financing chain spans both regions, thus requiring compliance with the relevant regulations of both the mainland and Hong Kong.

Hong Kong regulatory aspects

Hong Kong has not yet introduced clear normative legal documents regarding the issuance and regulation of RWA, and is still in the exploratory stage. Currently, during the review process of RWA projects under sandbox regulation, there is still a situation of "one project, one discussion."

However, by adhering to Hong Kong's consistent regulatory principles for financial assets and referring to the specific issuance rules for similar financial products, the success rate can be greatly improved. Hong Kong consistently adopts a "substantive regulatory principle" for financial assets, which means assessing compliance based on the substance of the asset rather than its appearance.

Specifically, the regulations need to be judged according to the regulatory rules applicable to the corresponding physical assets of RWA. For example, if the underlying asset is a bond, then the review regulations apply to the relevant provisions of Hong Kong's Securities and Futures Ordinance.

Mainland regulations

Since the underlying assets of tokenization are located in the mainland, it is necessary to pay close attention to the legality of the underlying assets themselves and the legality of their operational methods.

In terms of the legality of the underlying assets themselves, objects can be divided into three categories:

1. Circulating goods: items that are legally allowed to circulate freely.
2. Restricted Circulating Goods: Items that are subject to certain legal limitations on the scope and extent of circulation.
3. Prohibited Circulating Items: Items that are explicitly prohibited by law from circulation and transfer.

The objects used for RWA should be "circulating goods" or "restricted circulation goods" with permission.

In terms of the legality of operating methods, the operation of underlying assets needs to comply with mainland legal regulations, stay away from the red lines, and obtain necessary administrative permits.

It is not advisable to issue assets in Hong Kong at this stage.

Although certain assets may meet the "dual compliance principle," they may not be suitable for issuance in Hong Kong at the current stage.

On one hand, the RWA project in Hong Kong is still in the sandbox testing phase, and the selection of underlying assets is relatively cautious, leaning towards assets with "high-tech" or "clean and green" attributes.

On the other hand, some assets that are difficult to generate good cash flow are also not suitable for doing RWA in the Hong Kong sandbox, and the likelihood of approval is lower. For example, some real estate with low economic value, even with the new concept of "empowerment", is difficult to change the reality of its gradually decreasing market value.

Specific Onshore Asset Types Not Suitable for RWA

Jewelry and Cultural Artifacts

Jewelry and cultural items are a category with a high volume of inquiries but are the most difficult to provide clear legal opinions on. This is mainly because there are a wide variety of jewelry and cultural items, and the relevant regulations are scattered across various laws and regulations. Overall, it is currently not recommended to use jewelry and cultural items as the underlying assets for RWA.

The following situations can be directly vetoed:

1. Gemstone products with gambling nature
2. Processed jewelry and gemstones
3. The country bans the sale of biological products
4. Low-quality or processed jadeite or jade imitations
5. Precious metals such as pure gold and pure silver are subject to specific laws in certain countries that restrict or prohibit their circulation.

Intellectual Property

There are several projects for RWA related to intellectual property overseas, but there have been no successful cases in Hong Kong yet. However, if a certain intellectual property has significant commercial value, it can be attempted to apply for after the regulatory norms are clarified.

Agriculture and Agricultural Products

For agricultural and agricultural product RWA projects, if they meet the standards for ethical review in technology, have high technological content, research value, and good commercial value, they can also attempt to apply after regulatory norms are clarified.

pure concept project

It is important to clarify that RWA is different from crowdfunding. For purely conceptual projects, a veto opinion is usually given directly.

Conclusion

In the case where the underlying assets are neither in mainland China nor in Hong Kong, there are currently no clear regulations that require the assets to be in a specific region to apply for Hong Kong RWA. From the perspective of Hong Kong's positioning as an "international financial center", the geographical location of the underlying assets should not be a hindrance to RWA; the key lies in whether the assets are genuine, credible, compliant, and have investment value.