Background of Multi Polarization

Recently, the landscape has been quite active, with hot topics in the crypto world like the rise and fall of BTC, the surge in Rune and Stone tokens, and the buzz around meme-coins. Additionally, discussions around Bitcoin ETFs have drawn significant attention.

Internationally, issues such as the ongoing Russia-Ukraine and Israel-Palestine conflicts, recent assassinations in Saudi Arabia and Slovakia, and the crash of the Iranian president’s helicopter add to the chaos of 2024.

The decoupling of China and the U.S. is a reality, and the trends in international conflicts highlight a move towards multipolarity. This shift will lead to a restructuring of the global monetary system. As globalization gives way to a multipolar regional strategy, digital currencies will become crucial, inevitably linked to the physical world.

Meanwhile, more traditional institutions, especially on Wall Street, are discussing the future trend of tokenization. The future will see the physical world being tokenized. However, this future requires time, and the popularization, education, and transformation of inclusive populations into this system need the actual emergence of RWA. The RWA track includes the tokenization of centralized traditional finance, decentralized native tokenization, and potentially newer and more radical approaches.

Bitcoin ETFs’ development momentum already indicates the RWA track’s direction. Only by connecting with financial institutions and industrial capital in the physical world can significant changes in scale and new incremental users be achieved. Following the trends of Rune and memecoin, many believe the next sustainable hot topic will be the RWA track.

According to ROOTDATA’s RWA track project list, most current projects focus on DeFi product models using traditional financial products as yield-generating collateral assets, lacking genuine RWA tokenized products.

Figure1. ROOTDATA’s RWA Track Projects

Future Trends of RWA in Hong Kong

Since the 2023 Hong Kong Web3 Conference and the introduction of new virtual asset regulations, especially the launch of Type 7 licensed virtual asset trading platforms and security token regulations, many believe Hong Kong will become the core hub for RWA.

As mainland funds transition, there is natural optimism towards this direction due to the abundance of high-quality corporate assets and resources from securities firms, funds, and insurance capital. Therefore, there has been close attention and communication since last year with licensed brokers, asset management companies, and exchanges in Hong Kong and even offshore exchanges. However, reality does not meet the high expectations— “the ideal is full, but the reality is thin.”

We have summarized a future strategy for RWA in Hong Kong: “Compliance for institutions, tokens for retail, and linking stock and token products.”

Licensed and compliant RWAs rely on licensed exchanges for the tokenization of financial products, mainly focusing on debt or equity designs. These will be conservative and inclined towards traditional financial institutions and regulatory models, primarily targeting the institutional market (2B), with moderate issuance scale but weak liquidity, representing corporate financing attributes.

Non-licensed and compliant RWAs, relying on offshore RWA exchanges or alternative investment OTC, Swap exchanges, will tokenize physical assets, avoiding equity designs and integrating native token models to bypass traditional securities regulation. These will mainly target the retail market (2C), with flexible issuance scale, leveraging token economic models to pursue liquidity, representing retail investment (speculative) attributes.

The success of Hong Kong’s RWA lies in:

How to achieve the transformation from the 2B market to the 2C market?

This is not about capability, but whether traditional financial institutions and vested interest groups are willing to decentralize or be revolutionized. The current Hong Kong Web3 ecosystem, although loudly promoted, is essentially a power struggle among regulatory bodies and traditional financial interest groups. For instance, the current Hong Kong Bitcoin spot ETF, a promising RWA product, has turned out poorly because it was not granted to licensed virtual asset exchanges but remains in the traditional HKEX, with old financial players dividing the pie, resulting in low trading volume and minimal ecosystem drive.

Without revolution or innovation, Hong Kong’s licensed and compliant RWA products will end up the same. Licensed virtual asset exchanges will only be OTC for RWA product transactions and redemptions, with the core still lying in the interests of brokers, asset management, and institutional markets.

Principle 1: RWA product design can have more innovation. Although currently packaged as traditional financial products and then tokenized, they can be further innovated in OTC or ATS, similar to GameFi, where games are played in the game but incentives are in the finance. Security product tokenization might lack liquidity, so liquidity incentives can be created externally.

Conservative Approach to Licensed Compliance

The conservatism of licensed compliance for RWA (or STO) in Hong Kong might surprise you. Many assume that with exchange licenses issued and regulations in place, one can start moving quickly.

However, the reality is more cautious. For securities token issuance under Hong Kong’s licensed compliance, the asset package must first issue a fund, requiring a Type 9 asset management license. Then, issuing and underwriting RWA products need a Type 1 brokerage license (typically held by securities firms) that collaborates with Hong Kong financial institutions for distribution. RWA products, generally equity-based, must be traded on a Type 7 licensed exchange. Non-licensed exchanges in Hong Kong are gradually restricted from listing security tokens.

Many are interested in the Hong Kong RWA/STO issuance process. Here’s a detailed breakdown:

1. As a project party, if you are the asset owner or a third party serving the asset owner, the first step is to find an experienced securities firm with a Type 1 brokerage license (essential for financing channels and PI resources). Discuss the asset package design, whether simple or complex, based on the Hong Kong Securities and Futures Commission’s guidelines. Simple designs are debt-based, while complex designs are like ABS or REITs, awaiting detailed regulatory guidance.
2. You need a law firm with crypto business licenses for legal opinions on product structure, SPV, Fund structure, etc. An accounting firm is needed for asset valuation reports, and if it’s a corporate credit debt model, an internationally recognized rating agency’s credit rating report is required.
3. According to regulatory requirements, the RWA base product needs to issue a fund for the asset package or credit debt using a Type 9 asset management license. It can be a closed-end fund (for record filing) or an open-end fund (more regulatory requirements). If there is a series of issuance plans, prepare an umbrella structure for the fund during issuance. The license can be self-held. As an RWA physical asset (not 100% digital asset) fund, it can be a non-uplifted Type 9 license. If not, find a Type 9 asset management institution as the investment manager. An uplifted Type 9 license is preferable for regulatory recognition.
4. Tokenizing the RWA is essentially tokenizing the fund product, the core of security tokenization. Choose a public chain platform (currently usually Ethereum) and designate a digital wallet. Tokenize the fund product according to issuance scale, minimum share, minimum transaction amount, etc., and prepare manuals and customer service websites. This technical work might be the least challenging.
5. The most challenging part is institutional market distribution. This tests the brokerage firm’s capabilities in the brokerage business, mature distribution channels, PI customer groups, frequent roadshows, and cooperation with Hong Kong financial institutions for underwriting or distribution, and OTC market and block trades. Remember, the essence of RWA products is corporate financing, requiring pre-arranged underwriting and distribution.
6. Once the fund tokenization and underwriting are finalized, the tokens can be listed on a licensed exchange. Licensed exchanges only review the listing of tokens. They often have their Type 1, Type 9, and trust licenses to provide relevant services. Post-listing, distribution and underwriting institutions handle a series of transactions and digital asset custody, subsequent subscription and redemption, and RWA product investment and trading (currently limited to PI customers).
7. According to regulatory guidelines, initially, only PI investment is allowed. Retail market access requires meeting certain conditions, which are currently unspecified. Comparison with the stock market or retail investor protection perspective suggests requirements like the number of holding addresses, liquidity, market price, and net value stability.
8. The final step is the exchange’s opening of the retail secondary market for RWA products, allowing retail investment. Only here does a compliant RWA product achieve real success, but reaching this stage is a long journey.

Native Mode of Retail Tokens

Unlike the licensed compliance mode of virtual asset exchanges and security tokenization, there is a relatively aggressive or innovative native token mode. This mode is based on common law alternative investment regulations, avoiding equity-based designs, and directly tokenizing physical assets or digital certificates of physical assets. These non-security tokens are issued on offshore RWA exchanges or alternative investment OTC, Swap exchanges, with issuance models borrowed from token economic models. The scale can be large or small, targeting the retail market with natural liquidity, combining cash flow or market activities to manage market value.

Non-licensed exchange modes involve complex aspects like RWA asset issuance, trading, leverage and derivatives, and liquidity, to be discussed in another article. Here’s a brief overview of the non-security RWA token product design.

Principle 2: Design RWA products focusing on the real-world platform, not corresponding to physical assets but platform governance or utility tokens.

1. Non-security RWA products should not correspond to physical assets or map to asset rights. Support assets can be physical assets or rights, but the tokenization is platform-based or utility-based. This is complex, especially for those without traditional asset securitization experience.
2. The native mode of retail tokens focuses on non-security RWA tokens and alternative investment exchanges, combined with Crypto Funds (early Capital and later Maker). For instance, HashKey’s licensed STO/RWA products haven’t scaled up, but their retail token mode’s RWA market can use an offshore international station list + Tokenization department + Capital + Fund (Maker) combination.
3. Encourage retail and institutional participation through DAO, community, or node models, integrating real-world industry chain ecosystems into the digital and on-chain process. The 2C model starts with community building, product discussions, and node consensus, becoming part of the consensus early on.
4. The stock-coin linkage model, previously introduced, involves linking traditional financial stocks and virtual assets, using corporate stocks linked with virtual assets like Bitcoin or Bitcoin spot ETFs, driving up stock values alongside rising virtual asset values.
5. Native token mode combination: RWA NFT + FT + meme-coin. Use NFTs for retail identity and digital rights certificates, serving as anchors for liquidity token airdrops. Change equity or dividend STs to liquidity or governance utility FTs for RWA application scenarios and incentivization. Combine RWA narratives with brand or IP franchise, upgrading token media traffic into a meme-coin leading the narrative.
6. Tokenization of RWA cash flow, structuring cash flow into a liquidity pool via SPV or smart contracts, creating a special Maker Fund or Liquidity swap pool for continuous liquidity management.
7. Upgraded stock-coin product linkage, adding RWA asset tokens issued by listed companies based on their core business or asset packages, using CB to purchase RWA tokens. These tokens can be airdropped (gifted) with stock (real financial assets), combining company stocks, virtual asset investments, and RWA token issuance. This uses convertible bonds for partial underwriting, with a portion of operating cash flow dedicated to RWA token liquidity pools, airdropping/selling company stocks or options to RWA token holders. This mutual value and user growth approach could be discussed in a Space or live session if there’s interest.

Principle 3: The limited and unlimited space of RWA tokenization.

RWA token principle: “Preferably useless but sounds useful, generally not used.”

1. Considering RWA assets from the perspective of usefulness and space, some suitable RWA asset categories include:

• Financial commodity digital certificates like durian, agarwood, etc.
• AI computing power, especially combined with #DePIN distributed computing and edge computing.
• Green energy, combined with #DePIN renewable energy ecosystems and carbon credits.
• Music and sports fan ecosystems from a streaming and idol economy perspective.
• New content platform models, mainly cultural and film IP franchises, content distribution, Watch2Earn, etc.

In conclusion, the future of RWA is promising, potentially beyond the discussed modes. Due to the article’s length, further detailed discussion can happen in a Space or live session. Whether it’s licensed compliant exchanges’ RWA products, alternative investment exchanges’ RWA tokens, or combined with listed companies, the essence is following the most energetic assets, funds, and people. Looking at Bitcoin spot ETF data and development, it becomes clear why RWA could be the next sustainable and long-term hot track!

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