What conditions must mainland assets meet to issue RWA projects in Hong Kong?

Recently, we have received a large number of inquiries regarding the RWA( physical asset tokenization ) project, which involves a wide variety of underlying assets, including agricultural products, real estate, precious metals, and even some purely conceptual projects.

It is important to clarify that, in the context where the 9.4 announcement and the 9.24 notice are still effective in mainland China, only RWA projects that are strictly reviewed through the Hong Kong sandbox and issued under regulation possess a certain level of compliance. Other types of RWA projects carry extremely high risks, especially those issued for residents of mainland China.

This article will elaborate on which mainland assets are suitable for the issuance of RWA in the Hong Kong sandbox and which are not suitable, helping readers to plan their business development more efficiently.

01 Basic Understanding: Restrictions and Evaluation Criteria for RWA Asset Issuance in Mainland China

First, it must be clarified: assets located in mainland China and primarily operated for mainland residents can indeed do RWA, and there are multiple successful cases that prove this.

However, there are indeed restrictions on the issuance of RWA for 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 provisions of Hong Kong
2. Assets that do not comply with the laws and regulations of the mainland
3. It is not advisable to issue assets in Hong Kong at the current stage.

Mainland assets must comply with the "dual compliance principle" when issuing RWA in Hong Kong.

The logic of this principle is clear: the underlying assets are located on the mainland, but the tokenized assets are issued and operated in Hong Kong. The entire financing chain spans two locations, which naturally requires compliance with the legal regulations of both places— the underlying assets must be compliant in both the mainland and Hong Kong.

1. Hong Kong regulations require

As Hong Kong is primarily responsible for asset tokenization and financial operations in the RWA process, we need to pay special attention to the requirements of Hong Kong's financial regulatory laws concerning the underlying assets, such as the Securities and Futures Ordinance, the Banking Ordinance, the Insurance Ordinance, and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

Currently, Hong Kong has not yet issued clear normative legal documents regarding the regulation of RWA issuance and is still in the exploratory stage, with a "one project, one discussion" situation during the review process. However, this does not mean that there are no reference standards at all. Understanding Hong Kong's consistent regulatory principles for financial assets and referring to the issuance rules of similar financial products can significantly increase the success rate of projects.

Hong Kong's adoption of the "Substantive Supervision Principle" ( or "Perspective Regulation" ) for financial assets means that compliance depends on the substance of the asset rather than the outer shell, and it is not feasible to cover up the illegal kernel with a compliance appearance. The specific specifications depend on the regulatory rules applicable to the RWA's physical assets. For example, if the underlying asset is a bond, the Hong Kong Securities and Futures Ordinance and relevant regulatory documents will be applied to the audit standard.

2. Mainland Regulations Requirements

Due to the "physical" underlying assets being tokenized in the mainland, attention must be paid to the legality of the underlying assets themselves and the legality of their operational methods.

In terms of the legality of underlying assets, according to the Civil Code and related judicial interpretations and practices, property can be classified into three types based on its circulation ability:

1. Circulating goods: Goods that civil subjects are allowed to freely circulate under the law.
2. Restricted Circulation Objects: Objects that are subject to legal restrictions on the scope and extent of circulation.
3. Prohibited Circulating Objects: Objects that are expressly prohibited by law from circulation and transfer.

The items used for RWA should be "circulating items" or "restricted circulating items" that are permitted for circulation.

In practice, "restricted circulation items" usually include: cultural relics, specific pharmaceuticals, pesticides, tobacco monopoly products, salt, periodicals, weapons and equipment, military supplies, etc.

"Prohibited circulating items" typically include: drugs, obscene materials, counterfeit currency, counterfeit trademark goods, wildlife and their products banned from circulation by law, illegal publications, etc.

In terms of operational legality, Hong Kong has cash flow requirements for the underlying assets of RWA projects. The projects currently issued are all commercial projects with actual application scenarios, therefore the operation of the underlying assets must also comply with Chinese legal regulations: stay away from the red line and obtain the necessary administrative licenses.

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

Although these assets comply with the "dual compliance principle", they are not suitable for issuance in Hong Kong at this stage.

On the one hand, Hong Kong RWA is still in the sandbox experimental stage, and it is more cautious in the selection of underlying assets, and clearly recommends assets with "high-tech" and "clean and green" attributes. Therefore, at the current stage of issuing RWA projects in Hong Kong, the underlying assets should have at least one of the above two characteristics, such as non-physical property rights and interests such as carbon emission rights that are closely related to the green economy.

On the other hand, some assets that are difficult to generate good cash flow are not suitable for RWA in the Hong Kong Sandbox, and the probability of passing is low. For example, real estate with low economic value, no matter how it is "empowered" by new concepts, it is difficult to change the reality that its market value is gradually decreasing, and the possibility of issuing RWA for such assets is very low.

02 These specific mainland assets are generally not suitable for the issuance of RWA.

After understanding the principles of determining whether the underlying assets can issue RWA, we will provide concentrated answers to the asset types that have been frequently consulted or need special explanation recently.

) jewelry and cultural relics RWA

The jewelry and cultural relics category has a large volume of consultations but is the most difficult to provide clear legal opinions on. This is mainly due to the wide variety of items, the complexity of the industry, and the various restrictions scattered across different laws, judicial interpretations, administrative regulations, departmental rules, and national standards. For uncommon categories, extensive legal research is usually required to provide opinions. Overall, at this stage, it is not recommended to consider jewelry and cultural relics as underlying assets for RWA.

The following situations can be directly vetoed:

1. Gem products with gambling nature, that is, items whose quality cannot be judged by their appearance and whose internal quality can only be known after cutting, such as jade rough, unpeeled turquoise rough, unopen shell pearls, etc.

2. Processed gemstones, such as B-grade jadeite, C-grade jadeite, etc.

3. The country prohibits the sale of biological products ### organic gemstones ###, such as ivory, hornbill products, conch, queen conch, coral, rhinoceros horn, tortoiseshell, copal resin, sea ivory, amber pillows, amber powder, cinnabar, etc.

4. Low-quality or treated jadeite or imitations, such as sodalite jade, Guatemalan jade, and heat-treated jade.

5. Precious metals such as pure gold and pure silver that are restricted or prohibited from circulation by specific national laws.

( intellectual property RWA

Intellectual property assets ) copyrights, trademarks, patents ### etc., have appeared in many projects in the international crypto asset circle, including film and television projects that achieve rapid financing through tokenization. While there are no successful cases in the RWA sector in Hong Kong, IP may be an underlying asset worth exploring. If the intellectual achievement does have great commercial value, it can be tried to apply after the regulatory norms are clarified.

( Agriculture and Agricultural Products RWA

For agricultural projects, if they meet the prerequisites of ethical review in science and technology, possess high technological content, research value, and good commercial prospects, they may also attempt to apply after regulatory norms are clarified.

) pure conceptual RWA

It must be clear: RWA is not crowdfunding. For such projects, a veto opinion is generally given.

03 Conclusion

To add: Is it possible to issue an RWA in Hong Kong for the underlying assets where the "entity" is neither in the mainland nor in Hong Kong? At present, there is no requirement that assets must be located in a specific region in order to apply for a 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 an obstacle, and authenticity, credibility, compliance and investment value are the key indicators.