Mainland Assets Issuance of RWA in Hong Kong: Restrictions and Opportunities

Recently, there has been a surge of inquiries in the market regarding the tokenization of physical assets ( RWA ) projects, involving various fields such as agricultural products, real estate, precious metals, and even some purely conceptual projects.

It is worth noting that under the current regulatory environment, apart from RWA projects that are strictly reviewed and issued under regulation through the Hong Kong sandbox, other types of RWA projects carry higher risks, especially those issued to residents of mainland China.

This article will explore in detail which mainland assets can be used in the Hong Kong sandbox and which cannot, to assist relevant parties in conducting business more efficiently.

Basic Understanding and Judgment Criteria for Mainland Assets as RWA

First, it is necessary to clarify: assets located in mainland China and primarily operated for mainland residents can be subject to RWA, and this has been supported by previous successful cases.

However, there are indeed some 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 regulations of the Hong Kong region
2. Assets that do not comply with the legal provisions of the mainland region.
3. It is not suitable to issue assets in Hong Kong at this stage.

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

Considering that the assets are in the mainland, but the tokenized assets are issued and operated in Hong Kong, the entire financing chain spans both regions, thus requiring compliance with the regulatory requirements of both the mainland and Hong Kong.

Hong Kong regulations

As a key region for asset tokenization and financial operation in RWA projects, Hong Kong needs to pay close attention to the requirements of financial regulatory laws and regulations regarding the underlying assets when issuing financial products, such as the Securities and Futures Ordinance and the Banking Ordinance.

Although Hong Kong has not yet issued clear regulations for the issuance and supervision of RWAs and is still in the exploration stage, understanding Hong Kong's consistent regulatory principles for financial assets and referring to the specific issuance rules of similar financial products can greatly enhance the project's success rate.

Hong Kong adopts the "substantive regulatory principle" for financial assets, which assesses compliance based on the substance of the asset rather than its appearance. Specifically, it requires judgment based on the regulatory rules applicable to the physical assets corresponding to RWA.

Mainland regulations

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

The legality of the asset itself can be judged from the perspective of the circulation of goods, divided into:

1. Circulating goods
2. Restricted Circulation Items
3. Prohibition of Circulation of Goods

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

In terms of the legality of the operating methods, due to Hong Kong's cash flow requirements for RWA projects' underlying assets, the operation of the underlying assets must also comply with the legal regulations of the mainland, stay away from the red line, and obtain the necessary business permits.

Assets are not suitable for issuance 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, Hong Kong's RWA is still in the sandbox experimental stage, being relatively cautious in the selection of underlying assets, clearly recommending 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, such as some real estate with relatively low economic value.

Specific Mainland Asset Types Not Suitable for RWA

jewelry and cultural relics

There is a large demand for consulting on RWA projects related to jewelry and cultural artifacts, but it is also the most challenging to provide clear legal opinions on. This is mainly because there are various types of jewelry and cultural artifacts, and the relevant regulations are scattered across different laws and regulations. Overall, it is currently not recommended to treat jewelry and cultural artifacts as underlying assets for RWA.

The following situations can be directly vetoed:

1. Gemstone products with gambling nature
2. Processed jewelry and gemstones
3. Bioproducts banned for sale by the state
4. Low-quality or treated jadeite or imitations
5. Countries such as those with pure gold, pure silver, and other precious metals have specific laws restricting or prohibiting their circulation.

intellectual property

Although there have not yet been successful intellectual property RWA cases in Hong Kong, this is not an unexploitable direction. If a certain intellectual property does indeed have significant commercial value, it can be attempted to "break through" after regulatory norms are clarified.

agriculture and agricultural products

For agricultural and agricultural product RWA projects, if they have a high technological content, research value, and good commercial prospects under the premise of meeting the ethical review standards of technology, they can also attempt to apply after the regulatory norms are clarified.

pure conceptual type

It should be clarified that RWA is not equivalent to crowdfunding. For purely conceptual projects, a rejection opinion is usually given directly.

Conclusion

For underlying assets that are neither in the mainland nor in Hong Kong, can RWA be done in Hong Kong? Currently, there is no clear regulation stating that assets must 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 assets should not be an obstacle to RWA; the key lies in whether the assets themselves are real, credible, compliant, and have investment value.