Wang Yang: Hong Kong should become the leader of the future RWA ecosystem

Author: Wang Yang, Vice President (University Development) of the Hong Kong University of Science and Technology and Chief Scientist of the Hong Kong Web3.0 Association; Zhu Haokang, a doctoral student in financial technology at the Hong Kong Polytechnic University and a founding member of the RWA and Stablecoin Working Group of the Hong Kong Web3.0 Association

On June 1 this year, the official implementation of Hong Kong’s new virtual asset regulations undoubtedly marked an important milestone in the development of Web 3.0 in Hong Kong. This historic event strongly confirms the views expressed by the Chief Executive of the Hong Kong Special Administrative Region, Lee Ka-chiu, at the founding ceremony of the "Hong Kong Web3.0 Association" on April 11 this year, that is, Web3.0 has a profound impact on the development of financial technology. and the SAR government’s open attitude and firm determination in this regard. At the same time, the Hong Kong Securities and Futures Commission opened applications for virtual asset trading platform licenses, and compliant operators can now provide virtual asset services to professional and retail investors. The implementation of this policy will undoubtedly further promote the development of the virtual assets industry and pave the way for the wider expansion of virtual assets and Web3.0 in Hong Kong. Although the global regulation of virtual assets is tightening, the SAR government has firmly maintained its position. A series of strategies and actions have clearly demonstrated its determination and support for promoting the development of Hong Kong's virtual assets industry. This is undoubtedly This further proves the SAR government’s firm determination to develop the virtual asset space and Web3.0.

Create a Web3 compliant, reasonable and friendly ecosystem

However, Hong Kong’s development in the field of virtual assets and Web3 has mainly focused on compliance and licensing, rather than on building a vibrant ecosystem that allows licensed institutions to have a viable business plan. Although the Securities and Futures Commission implements such supervision to maintain the order of the virtual market, this licensing system is undoubtedly a heavy burden for virtual asset companies in Hong Kong. The saying "A license to be killed" is more appropriate here, because currently, licensed exchanges like OSL are losing tens of millions of yuan every year after obtaining the license. Therefore, Hong Kong urgently needs to have a broader vision and look towards building the world's first Web3 compliant, reasonable and friendly ecology, and truly leading the development of global Web3.

The author firmly believes that Hong Kong’s next step on the development path of Web3.0 should focus on the in-depth integration of virtual world and real-world assets. We can make full use of blockchain technology and build a powerful Web3 ecosystem based on Hong Kong dollar stable currency based on Hong Kong dollar stable currency. Our focus should be on the digitization and tokenization of Real World Assets ("RWA"), such as bonds, private credit, trade finance, real estate, carbon credit certificates, precious metals, etc. This series of actions will greatly promote the close integration of virtual economy and real assets. In fact, the tokenization of RWA is not only the greatest potential for the development of Web3 in Hong Kong, but also the future trend of Web3 in the world.

In a well-regulated environment, RWA can provide legitimate players with a chance to truly prosper and not just fall victim to being “killed for holding a license.” This transformation will undoubtedly lead Hong Kong to the forefront of global Web3 development.

The tokenization of RWA—the conversion of tangible or intangible assets into digital tokens—is a groundbreaking shift in the field of digital assets that is expected to redefine the market landscape. The introduction of blockchain technology has made RWA a revolutionary optimization compared to traditional securitization. RWA tokenization provides transparency and security and expands liquidity by enabling fractional ownership. This method not only solves the problem of low efficiency of the traditional financial system, but also breaks the limitations of the traditional financial system, enabling assets to be digitized and unique, shortening the distance between traditional finance and new finance, and meeting the personalized financial needs of users. , lowering the investment threshold. This will stimulate more small and medium-sized investors to enter and participate in financial activities, thereby creating huge value and benefits. At the same time, RWA injects liquidity and diversity into the real economy, increasing the scale of funds by expanding asset types.

In addition, RWA based on the Hong Kong dollar stable currency also has a layer of security, allowing traditional finance and the real economy to enjoy the advantages of liquidity, transparency, innovation and other advantages brought by blockchain technology while protecting investors and participants. financial security. In September 2022, research from the Boston Consulting Group (BCG) predicted that the tokenization of real-world assets would reach $16 trillion by 2030. Accordingly, Citibank released a 162-page research report in March 2023, comprehensively analyzing the path for Web3 to achieve one billion users and for digital assets to reach tens of trillions of dollars. Citibank predicts that by 2030, US$4 trillion to US$5 trillion in assets will be tokenized, and the volume of trade finance transactions based on blockchain technology will reach US$1 trillion.

Reasonable supervision promotes the healthy development of RWA

The healthy development of RWA ecology is inseparable from reasonable supervision. However, it is not easy to build a compliant, reasonable and friendly RWA tokenization environment, which requires the joint efforts of the government and the industry. To this end, we recommend using the “RWA 2+4” previously advocated by the author Zhu Haokang as the entry point for feasibility studies. This methodology conducts research and practice around two types of tokens (security tokens and utility tokens) and four core elements (legal basis, financial framework, technical tools, and data drivers), with a view to finding opportunities in challenges and promoting RWA healthy development.

First of all, security tokens (Security Tokens) represent the ownership or income rights of assets or enterprises, and their value is usually directly related to the performance of the physical assets or enterprises they represent. People who purchase such tokens typically expect to receive returns through appreciation of the asset or distribution of income. On the other hand, utility tokens (Utility Tokens) provide the right to use a certain service or resource, while allowing the data generated in the token process to be uploaded to the chain. Understanding the characteristics and differences of these two tokens is crucial to correctly evaluate and invest in RWA.

Next, we need to focus on four core elements: legal supervision, financial structure, technical support and data application.

The law forms the basis of RWA, which determines which assets can be tokenized and the regulations that need to be followed during the tokenization process. As an important financial center in the world, Hong Kong has a complete securities legal system and has the unique advantage of promoting compliant Security Token Offering ("STO"). Hong Kong’s securities laws comprehensively regulate the issuance and circulation of various securities assets such as stocks and bonds. Financial assets that RWA requires tokenization, such as stocks, bonds, funds, etc., have clear legal definitions in the Hong Kong market. In addition, the Hong Kong Securities Regulatory Commission has formulated complete review standards for securities issuance and listing. RWA for STO needs to be linked to corporate equity, debt and other assets. These basic assets need to comply with the information disclosure and approval regulations of the China Securities Regulatory Commission to ensure their quality. In addition, Hong Kong has established a strict investor suitability management system to prevent ordinary investors from purchasing complex and high-risk RWA products.

Finance is the framework of RWA, which defines the specific structure of asset tokenization and transactions, including asset evaluation, audit and confirmation, token issuance and trading, and related risk management. Hong Kong has rich experience and world-leading scale in debt and equity financing. Investment banks and audit institutions in Hong Kong can provide professional valuation and audit services for RWA's underlying assets, determine the quality and clear ownership of the assets, and provide a basis for token issuance. In addition, Hong Kong's compliant and licensed virtual asset trading platform can ensure that the issuance and trading of RWA tokens are open and fair.

Technology is the tool of RWA, which provides the technological means to achieve tokenization and transactions. This includes blockchain technology, smart contract technology, oracles, cross-chain and related security and privacy protection technologies, etc. Since Hong Kong issued a virtual asset development policy declaration on October 31, 2022, outstanding blockchain technology companies from all over the world have begun to actively settle in Hong Kong.

At the "2023 Shanghai Blockchain International Week. The 9th Blockchain Global Summit" held on September 19, 2023, Ren Jingxin, CEO of Hong Kong Cyberport Management Co., Ltd., said that Cyberport now has more than 190 Web 3.0 related companies include important underlying blockchain infrastructure companies and enterprises, such as zCloak, a digital identity and privacy computing infrastructure company, and Safeheron, a professional digital asset custody solution company.

Establish a public chain that complies with Hong Kong standards

Data is what drives RWA, which can provide important information about assets and markets to support investment decisions and market analysis. RWA tokenization, a new investment method, not only provides investors with a broader range of investment options, but also brings a large amount of data and rich information to the market, such as transaction data and user behavior data. These data form a powerful driving force, greatly improving the ability of asset operators and investors to understand market dynamics, predict market trends, and manage investment risks. The application of these data will also promote the organic combination of artificial intelligence and Web3, further promoting the development of Hong Kong's technological innovation.

In order to promote the development of RWA tokenization in Hong Kong, we first need to build a compliant and powerful infrastructure, of which blockchain technology is the core part. It not only provides a decentralized, secure and transparent platform that allows assets to flow globally, but is also able to automate complex financial transactions and agreements. However, due to the great complexity of the process of putting RWA on the chain, we need to implement a customer due diligence (KYC) mechanism that is strong, secure and compliant with Hong Kong standards. Some organizations such as the Hong Kong Web3.0 Association have proposed establishing a new public blockchain for RWA in Hong Kong, with corresponding KYC mechanisms built into it. Although establishing a new public chain requires a lot of technical investment and extensive community building, it is a key link in promoting the development of RWA and an important step in Hong Kong's financial technology innovation.

Of course, establishing a new public chain is not something that can be accomplished overnight. It requires a lot of technical investment, including designing an efficient consensus mechanism, building a robust network architecture, and developing easy-to-use clients. In addition, extensive community building and management are also required to attract and retain developers, users, and investors. We believe that as long as Hong Kong is determined to become a leader in RWA, these challenges will be overcome quickly.

Stablecoins are another infrastructure for RWA tokenization that cannot be ignored, and their healthy implementation is crucial to the development of RWA. We must ensure its effective implementation in Hong Kong and pave the way for the further development of RWA. As a hub for the development of global Web 3.0 and an international financial center, it is necessary for Hong Kong to quickly issue Hong Kong dollar stable coins. As RWA flourishes, demand for stablecoins is expected to grow dramatically.

In our previous article "Proposing that Hong Kong issue a Hong Kong dollar stable currency backed by foreign exchange reserves", we have proposed that Hong Kong should issue a unified Hong Kong dollar stable currency (HKDG). However, when we saw Singapore’s regulatory regime for the stablecoin market, namely the Singapore Stablecoin Framework “Response to Public Consultation: Proposed Regulatory Approach to Stablecoin Related Activities”, we were very concerned that Hong Kong would adopt a similar approach to stablecoins. policy, thus having a serious negative impact on the future development of RWA in Hong Kong. Singapore's stablecoin policy does not have an overall unified plan for the issuing entities and linked currency types of stablecoins. This will inevitably lead to the fragmentation and confusion of stablecoin issuance plans, and will most likely trigger vicious competition among stablecoins. Increase financial risks, hinder the formation of mature stablecoins, and may even make stablecoins a marginalized niche product. This approach cannot meet the large-scale demand for stablecoins under the comprehensive development of RWA in the future.

Therefore, we once again strongly call on Hong Kong to launch a unified stable currency, guided by overall planning, issued by chartered institutions (which can include the government and financial institutions such as banks, insurances, funds, etc.), and equipped with corresponding profit distribution plans. Only in this way can we avoid market fragmentation, reduce financial risks, meet the large-scale demand for stablecoins, make Hong Kong stablecoins a mature and widely used financial product, pave the way for the healthy development of Hong Kong’s RWA ecosystem, and further consolidate Hong Kong’s role in Global leader in financial technology.

Actually we don't have much time. The field of RWA tokenization has attracted a lot of attention and has been widely used in different industries. As part of the decentralized finance (DeFi) protocol, MakerDAO was one of the first institutions to incorporate RWA into its strategic planning. As early as 2020, MakerDAO passed a proposal to use RWA as a mortgage for tokenized real estate and other items. This decision significantly expanded the issuance scale of DAI (MakerDAO’s stablecoin). Although the overall situation of DeFi has not been ideal in the past year, MakerDAO's investment in the RWA field has continued to increase. According to statistics, as of May this year, MakerDAO’s total investment portfolio in RWA has reached 2.34 billion DAI. It is predicted that the annualized revenue from RWA will be as high as $71 million, which has become an important source of revenue for MakerDAO. In addition, the Propy platform in the United States is a typical application of real estate RWA. The platform uses blockchain technology to put real estate on the chain in the form of non-fungible tokens (NFTs) and supports purchases using cryptocurrency. It also uses artificial intelligence (AI) technology to improve transaction efficiency. On July 6 this year, Propy announced that the value of its platform token PRO increased from $0.268 to $0.571, an increase of more than 200%. This incident strongly proves the great potential and value of RWA in real-world applications.

Clear the regulatory policy for RWA token issuance

As an international trade port and world trade center, Hong Kong naturally has unparalleled advantages and huge market demand in terms of geographical location and economic status. Hong Kong has the ability to lead the global RWA market, so it should seize the opportunity and build a Hong Kong-based RWA business ecosystem as soon as possible. First of all, we need to clarify the regulatory policies for RWA securitization and security token issuance (STO), clarify the scope of assets that security tokens can be linked to and information disclosure requirements, and protect the rights and interests of investors. Establish a RWA token issuance and trading platform in exchange markets such as the Hong Kong Exchange to improve its liquidity.

We should encourage banks, insurance, funds and other financial institutions to make full use of their professional capabilities to participate in RWA business. At the same time, Hong Kong should strengthen cooperation with Singapore, the European Union and other places in the field of RWA tokenization business to jointly expand the market. Through education and training, we can accumulate professional talents required for RWA tokenization business. Building an open, standardized and dynamic RWA tokenized business ecosystem will effectively enhance Hong Kong’s digital economy and financial technology capabilities and lay a solid foundation for Hong Kong’s future.