How to prevent the RWA craze from turning into the next financial bubble?

In the era of digital finance, traditional financing models for enterprises, especially equity financing represented by the issuance of stocks for public listing, as well as asset securitization financing in forms like REITs, are facing a strong challenge from the emerging model of real-world asset tokenization (RWA Tokenization). Recently, whether domestically or internationally, the trend of RWA tokenization has been surging, becoming a hot topic of discussion on the streets, bringing both a beautiful vision for financial technology innovation and new risk hazards.

1. RWA tokenization replacing traditional financing models for enterprises is a major trend

RWA tokenization is the process of converting the ownership or revenue rights of real-world assets into digital tokens issued on the blockchain. Its rise is not coincidental, stemming from its comprehensive superiority over traditional financing methods in terms of financing efficiency, cost, and asset accessibility.

First, through smart contracts, RWA tokenization can automate the processes of issuance, trading, and settlement, significantly shortening the financing cycle. Transactions can be conducted 24/7, and settlements are almost instantaneous (T+0), greatly improving the efficiency of capital turnover. Second, by reducing reliance on traditional intermediaries such as investment banks, the issuance process of RWA tokenization is very convenient, and the automated execution of smart contracts also reduces ongoing management and compliance costs. At the same time, asset tokenization achieves the separation of ownership and income rights of assets, greatly lowering the investment threshold.

Theoretically, any financing activity is a redistribution of socio-economic resources across space and time. The advantages of RWA tokenization confirm the Coase Theorem proposed by Nobel Laureate Ronald Coase. This theory states that when transaction costs are zero or sufficiently low, regardless of how initial property rights are defined, the market can ultimately achieve an efficient allocation of resources (Pareto optimality) through negotiation and trade. The high intermediary fees, information search costs, and contract enforcement costs in traditional financial markets are precisely the "transaction costs" that hinder the efficient allocation of resources. RWA tokenization, through the power of financial technology, breaks down the barriers of traditional financial markets, achieving "disintermediation" in the financing process, "democratization" of assets, and "frictionless" transactions, thereby allowing a broader range of assets and investors to participate in the market, making significant progress towards Coase's ideal world.

Although RWA still faces challenges in terms of legal regulations and market infrastructure, its significant advantages in efficiency and cost indicate that it will gradually replace traditional methods such as IPOs and REITs in the future, becoming the mainstream financing model in the digital financial era.

2. The Huge Risks Hidden Beneath the RWA Boom

Currently, RWA tokenization is sweeping the global financial and technology sectors with unprecedented enthusiasm. Internationally, from JPMorgan's Onyx platform to BlackRock's BUIDL fund, traditional financial giants are entering the arena, and crypto platforms like Chainlink and MakerDAO are actively promoting various assets. Traditional real estate, bonds, artworks, carbon credits, and even intellectual property are all attempting to issue RWAs. After the recent issuance of regulations for digital assets and stablecoins by the Hong Kong SAR government, domestic tech companies and financial institutions are also eager to try, continuously launching RWA innovation projects. In this race to get ahead, various scenarios and asset types hope to achieve value reassessment and financing convenience through RWAs.

However, in such a wave of enthusiasm, we must maintain a clear mind and hold a deep reverence for financial risks. Looking back over a thousand years of financial history, we can clearly see a rule: human financial innovation has never truly eliminated** or even reduced**** risk. On the contrary, as the complexity of financial instruments and systems continues to rise, risks are often more cleverly hidden, transferred, and amplified, requiring the establishment of a more完善的监管和法规体系 to control their harm.**

Every major crisis in financial history has been closely linked to the financial innovations of the time. From the "Tulip Mania" of the 17th century to the "Dot-com Bubble" of the late 20th century, and to the global crisis of the 21st century, this has been consistently proven.

The global financial crisis of 2008 serves as a cautionary tale for the current development of RWA. Asset securitization itself is an important financial innovation that packages illiquid assets (such as mortgages) into tradable securities (like MBS and CDO), theoretically able to diversify risk and increase liquidity. However, in the years leading up to the crisis, in pursuit of higher yields, Wall Street packaged a large number of low-quality "Subprime Loans" into securitized products under the guise of technological advancement and financial innovation, and through complex financial engineering and the "endorsement" of credit rating agencies, these high-risk assets were wrapped into seemingly safe AAA-rated securities. Yet, most investors, including many professional financial institutions, were unable to see the true risks of the underlying assets. The complexity of the financial system rose sharply, while transparency correspondingly decreased. Driven by market euphoria, lending institutions no longer cared about the true repayment ability of borrowers, as they knew these loans would soon be packaged and sold to the next tier of investors. This "hot potato" model severed the connection between risk bearers and risk creators, leading to a sharp decline in market moral hazard and credit standards, creating a "tipsy and euphoric" financial feast. When housing prices fell and subprime loan default rates soared, these seemingly diversified risks rapidly transmitted through the interconnected financial derivatives to the entire financial system, triggering a global liquidity crisis and credit tightening. The collapse of Lehman Brothers, where I once worked, came crashing down, and a century of glory was ruined in an instant, leaving one to sigh.

RWA tokenization is essentially a continuation and upgrade of asset securitization in the blockchain era. It similarly promises higher liquidity, lower costs, and wider participation. However, no matter how advanced the technology is, if the underlying assets used for tokenization are of low quality, even the most sophisticated tokenization structure cannot create real value and cannot change the fundamental financial principle of "Garbage In, Garbage Out." Although concepts such as blockchain, smart contracts, and decentralized oracles are novel, once they are used to package and obscure the real risks of the underlying assets, they will become a new generation of "financial alchemy." If the regulatory system cannot keep pace in a timely manner to set clear boundaries and bottom lines for innovation, it may lay the groundwork for the next crisis.

3. The premise of asset securitization financing is having continuous and predictable cash flow

In the wave of RWA tokenization, various technological concepts are overwhelming: asset on-chain, automatic execution of smart contracts, decentralized identity verification, oracles providing off-chain data, etc. These technological innovations undoubtedly bring unprecedented imaginative space to the financial market. However, when we peel away the fog of these novel concepts and return to the essence of finance, we find an unshakable truth: the premise of any asset securitization financing must be assets that can generate continuous and predictable cash flows. Technological innovation can change the form of transactions but cannot change the source of value. True sustainable financial innovation can not only reduce transaction costs but should also reduce information asymmetry.

In 1970, Nobel Prize-winning economist George Akerlof proposed the famous "Market for Lemons" theory. This theory states that in a market with asymmetric information between buyers and sellers (such as the used car market), sellers (who have more information) know the true quality of their products, while buyers (who have less information) can only judge based on the average quality of the market. This leads to a vicious cycle: buyers, unable to distinguish between good cars (peaches) and bad cars (lemons), are only willing to pay an average price based on average quality. This average price is too low for the sellers of "peaches," and they will choose to exit the market. As "peaches" leave, the average quality in the market further declines, and the price buyers are willing to pay decreases as well. Ultimately, only "lemons" remain in the market, with high-quality products being driven out by inferior products, leading to a shrinkage or even collapse of the market.

This theory perfectly reveals the dangers of information asymmetry. In financial markets, if investors cannot effectively identify the true quality of assets, they will be skeptical of all products and demand a higher risk premium, which will harm the financing ability of high-quality assets. Meanwhile, those low-quality assets that are good at packaging and hiding risks (financial "lemons") may thrive instead.

A few years ago, the collapse of the P2P bubble in China was a vivid example of how financial innovation reduced transaction costs but increased the level of financial opacity. During the boom, many P2P platforms promised investors annual returns as high as 15% or even higher, while the true destination of their funds was a huge black box. A large amount of capital did not flow into high-quality SMEs that could generate stable operating cash flows, but was instead used for high-risk speculative projects, or even outright "Ponzi schemes." When the boom peaked and the inflow of funds became unsustainable, the entire game could not continue. Some founders absconded with the funds, leaving countless investors with nothing. If smart contracts and blockchain technology are used to tokenize assets with unstable or even non-existent cash flows, then it is merely using a more efficient way to create and distribute "digital lemons," which will inevitably result in the creation of financial bubbles.

Any financial innovation, no matter how glamorous its appearance, cannot violate the fundamental laws of value creation. For RWA tokenization, this means shifting the focus from the hype of novel technological concepts to the rigorous selection and management of high-quality underlying assets that can generate predictable, sustainable cash flows. The real advantage of blockchain technology lies in its potential to greatly enhance transparency, thereby reducing information asymmetry. Investors should be able to verify the status of underlying assets in real-time and in-depth through blockchain, such as the rental income records of a commercial property or the repayment history of a corporate loan. This is the correct direction to help investors distinguish between 'peaches' and 'lemons'. The value of smart contracts lies in reliably and cost-effectively executing distribution agreements based on stable cash flows (for example, automatically distributing rental income proportionally to token holders each month), rather than creating value out of thin air.

If RWA tokenization wants to develop healthily, it must firmly adhere to the bottom line of "cash flow is king." Only in this way can RWA truly become a bridge connecting quality assets with global capital, rather than becoming the next factory for creating "digital lemons" and financial bubbles.

4. Preventing the three types of projects from using RWA innovation as a guise for "cutting leeks"

The enormous potential and market heat of RWA tokenization will inevitably attract some speculators and even fraudsters who attempt to exploit ordinary investors' unfamiliarity with new technologies and their desire for high returns, packaging their schemes under the banner of "financial innovation" while engaging in money-grabbing practices. We must be vigilant against the following three types of projects:

First, there areinitial startup projects or virtual asset projects that have no cash flow. For ordinary investors, these projects are the most typical representatives of "digital lemons". Their biggest characteristic is the complete lack of or absence of verifiable operating cash flow, and all value is built on expectations and speculation regarding future asset appreciation.

For example, a newly established startup with only a business plan faces significant uncertainty about its future. In the traditional venture capital (VC) field, valuation and investment in such projects require highly specialized knowledge and due diligence, and the failure rate is extremely high. If the "future income rights" or "virtual equity" of such projects are tokenized and sold to the general public, it constitutes a significant risk. Ordinary investors cannot apply scientific valuation models like discounted cash flow to evaluate them because the core variable in the model—the future cash flow—is completely unknown. This turns investment into pure gambling, making it easy for project parties to exploit exaggerated promotions and market manipulation to inflate token prices, subsequently cashing out at high levels and leaving investors with nothing but losses. This is reminiscent of the "dot-com bubble" era, where many ".com" companies with no revenue and only concepts were driven to astronomical prices.

Some projects are attempting to package purely virtual world assets, such as game items, virtual land, and digital artworks, as RWAs for financing. While some high-value digital collectibles (like blue-chip NFTs) have a certain market consensus, the vast majority of virtual assets do not generate sustained cash flow. For example, the "land token" issued by a metaverse project relies entirely on the future user growth and ecological prosperity of the platform; equating it with real-world commercial real estate that can generate stable rental income is highly misleading. What investors are purchasing is not an "asset," but a high-risk "lottery ticket."

Secondly, projects with unstable cash flow or deteriorating industry trends. These projects, while having some cash flow, have extremely unstable income situations, or the overall environment of the industry is deteriorating. Their risk situation is similar to ST stocks in the A-share market, which may face the risk of corporate bankruptcy and value collapse at any time.

For example, a small hotel that relies on seasonal tourism may experience significant fluctuations in cash flow between peak and off-peak seasons; or a small manufacturing business that heavily depends on a single customer order may see its cash flow immediately interrupted if it loses that customer. The tokenization of such assets, using their best historical cash flow performance as a selling point to promise investors stable returns, is extremely imprudent. While the transparency of blockchain may showcase historical data, it cannot predict future volatility. For investors seeking stable returns, the risks associated with such assets are too high.

In addition, projects in declining industries also deserve caution. For example, a small commercial center located in a remote area with a continuous outflow of population, or a business engaged in sunset industries (such as telephone booths or film production). Although these projects may still have a meager cash flow at present, their long-term trend is clearly downward. Project parties may take advantage of investors' lack of understanding of macro trends in specific industries to attract funds by beautifying short-term financial data, essentially allowing new investors to bail out existing controlling shareholders.

Third, projects with unclear ownership of underlying assets or incomplete legal agreements. This is the most hidden and also the most fatal risk in RWA tokenization. The premise of tokenization is that the issuer has legal, complete, and undisputed ownership or disposal rights over the underlying assets. If the assets themselves have issues such as mortgages, seizures, or disputes over joint ownership, then the tokens issued based on those assets carry enormous legal risks. Even if a project superficially has a continuous and stable cash flow, if the underlying legal structure has flaws, the rights of investors are like castles built on sand, which may vanish at any moment.

A typical example is that some domestic enterprises issue dollar bonds overseas through the VIE structure, where there is no equity relationship between the overseas listing entity and the domestic actual operating entity, but control is exercised through a series of complex agreements. When a domestic entity defaults on its debt, overseas bondholders will find it very difficult to directly pursue and liquidate the core assets in the domestic market, as they do not hold direct debt or equity rights in the domestic company.

This risk could very well reoccur in the tokenization of RWA. If the legal design of an RWA project is flawed, and the token merely represents a "profit-sharing electronic contract" with the issuer, without a true SPV that can genuinely achieve bankruptcy isolation to hold the underlying assets, then if the issuer experiences operational difficulties or bankruptcy, investors will be unable to assert rights over the underlying assets, and their investments may be completely lost.

Five, the three bottom line standards for RWA tokenization issuance

In order to ensure that RWA tokenization can develop healthily and sustainably, and truly protect the interests of investors, assets planned for tokenization issuance must meet a series of stringent standards. These standards constitute the "bottom line" for qualified RWA projects and are also the core checklist for investors to conduct due diligence. A high-quality, investable RWA project must at least possess the following three core characteristics:

First, the project has sustainable and predictable cash flows that are sufficient to cover the investment costs. The essence of finance is value distribution, not value creation. Qualified assets must be able to generate predictable, non-speculative, continuous cash flows. Representative assets include: commercial real estate with long-term lease contracts (such as office buildings, shopping centers); toll rights for industrial infrastructure projects, such as highways, power plants, and computing centers; long-term orders or accounts receivable for agricultural specialty products, etc. In contrast, assets with significant income fluctuations that depend on market conditions or a single factor are not suitable as targets for robust RWA.

The expected cash flow returns of the financing project, after deducting all operating, management, tax, and other costs, should be sufficient to cover the capital cost of the investors and provide a risk premium that matches the risks they undertake. For example, a RWA project invested in national infrastructure has lower risk and correspondingly lower expected returns. In contrast, a RWA project investing in a portfolio of loans to small and medium-sized enterprises in emerging markets carries higher risk, thus should offer higher expected returns. The issuer also needs to provide prudent and credible financial forecasts and stress tests to demonstrate the reasonableness and robustness of its returns.

Second,** the ownership is clear and transparent, and the investors' right to profits is protected by strict legal provisions****.** This is the fundamental cornerstone of RWA tokenization, its importance even surpassing that of cash flow itself. If investors ultimately cannot assert legal rights over the assets, then no matter how stable the cash flow is, it is meaningless. The issuer must be able to provide indisputable legal documents proving their full and exclusive ownership or disposal rights over the underlying assets. This means that the underlying assets must not have any undisclosed mortgages, pledges, legal freezes, shared ownership disputes, or other encumbrances. Real estate needs to have government-recognized property registration certificates, and accounts receivable and other debt claims must have legally valid debt contracts and transfer notifications.

In addition, smart contracts and the tokens themselves must be clearly defined within the legal framework of the real world. What token holders enjoy—equity, debt, or some form of entitlement—must be explicitly stated in the issuance documents, and it must be ensured that such rights are legal and enforceable within the jurisdiction of the project. The tokens purchased by investors must directly or indirectly map to the claims against the assets in the SPV. Legal agreements need to clearly outline the process for asset disposal and how the proceeds will be distributed among token holders in the event of default, project liquidation, and other situations.

To protect investors from the operational risks of the issuer, qualified RWA projects should also adopt an SPV or similar legal entity structure. The issuer completely transfers the underlying assets to an SPV independent of the issuer through a "real sale" method. Even if the original issuer goes bankrupt, its creditors have no right to reclaim the assets that have been transferred to the SPV, achieving asset bankruptcy isolation.

Thirdly,** investors can gain real-time insights into the true value of underlying assets and have operable avenues for disposal and transfer****.** This is the key aspect that differentiates RWA tokenization from traditional finance, leveraging its technological advantages, and is also an important means of reducing information asymmetry and protecting investors.

Real-time transparent information disclosure is an advantage of blockchain technology. A high-quality RWA platform should utilize technologies such as Oracles to upload key operational data of underlying assets (such as rental rates and rental income of real estate, repayment status of loans, etc.) to the blockchain in real-time and in a trustworthy manner, and make it accessible for queries by all Token holders. Investors no longer need to wait for quarterly or annual financial reports published by issuers, but can "penetrate" the Token at any time to examine the true health status of the underlying assets. In addition to operational data, the fair value of the underlying assets should also be regularly assessed by independent third-party evaluation agencies, and the evaluation reports should be recorded on-chain as evidence. This provides important pricing references for trading in the secondary market, preventing disorderly price fluctuations and market manipulation.

Investors should not only have the right to buy but also the freedom to sell. The RWA issuance platform should also strive to build a compliant and transparent secondary trading market, allowing investors to easily transfer their held tokens. From the beginning of the project design, the project's expiration disposal or liquidation mechanism should be clearly defined. For example, after a loan matures and the principal and interest are recovered, or after a property is sold after the predetermined period, how the proceeds are returned to token holders needs to be clearly and transparently defined in the smart contract and legal documents.

In summary, these three major standards—financial ballast, legal safety net, and informational transparency—together constitute the core framework of a qualified RWA project. The absence of any one of these may cause the project to deviate from its intended track, bringing unforeseen risks to investors.

6. RWA issuance institutions should have the correct financial values

A good RWA tokenization issuance institution must have the correct financial values. It not only needs to have a foundation in financial technology but also requires a deep understanding of the essence of financial innovation and solid management capabilities for financial risks.

RWA tokenization is not a "new species" created out of nothing, but rather a continuation of the hundreds of years of financial practice of asset securitization in the digital age. Whether it's the stocks of the Dutch East India Company in the 17th century, mortgage-backed securities (MBS) in the 1970s, or today's RWA tokens, their essence is to divide, standardize, and circulate the rights to future cash flows in order to enhance asset liquidity and diversify risks. Many institutions that are new to the RWA field often have a strong technical background; they excel at building complex blockchain architectures and writing sophisticated smart contracts. However, if RWA is merely regarded as a "technical task," it would be a fundamental misunderstanding. The core of RWA is "A" (Asset) and the financial logic behind it, while "T" (Tokenization) is just the means and tool of realization.

A responsible issuance institution must respect financial risks and regard risk management as its lifeline. This includes conducting strict multi-round independent audits on smart contracts to prevent code vulnerabilities from being exploited; ensuring that the data sources of oracles are reliable and tamper-proof, and establishing secure asset custody and private key management solutions. Conduct extremely rigorous due diligence and screening of underlying assets, establish scientific valuation models and cash flow stress testing systems, and design reasonable credit enhancement measures (such as over-collateralization, reserve funds, etc.) to address potential default risks. Improve legal agreements to ensure that every aspect, from the establishment of SPV, asset transfer to token issuance, fully complies with the relevant securities laws, anti-money laundering, and KYC regulatory requirements of the jurisdiction.

Ultimately, what distinguishes an excellent issuance institution from a mediocre or even inferior one is its intrinsic financial values. Inferior issuance institutions view investors as "counterparties," with a business model centered on "monetizing traffic" and "earning transaction fees." They are eager to chase market trends, package concepts, and issue products as much and as quickly as possible, showing little concern for the long-term value of the underlying assets and the ultimate returns for investors. Excellent issuance institutions position themselves as "trustees" for investors, fully aware of their fiduciary duty to protect the safety of investor assets. They believe that the "soul" of finance must harness the "body" of technology, and that the ultimate goal of financial innovation is to serve the real economy and investors, rather than engage in self-referential speculative games. This leads them to consistently focus on core financial elements such as asset quality, legal structure, and risk isolation when designing products, rather than merely showcasing technological innovation.

The future of RWA tokenization does not depend on how many assets we can put "on-chain", but rather on whether we can adhere to the common sense and essence of finance**,**** namely, "the value of assets**** comes from**** sustainable**** and reliable cash flow,**** investment confidence**** stems from**** the transparency of information and the protection of law****". The true goal of RWA tokenization**** is not to expand the scale of financing, but**** to help genuinely good business projects in the real world obtain precise and convenient funding support through technological and model innovation, thereby**** improving global labor productivity, allowing for more products and services to be available for public consumption in the future, and expanding the Pareto optimal welfare boundary of society as a whole**—this is the original intention and mission of financial innovation.****