Written by: Xiao Za Legal Team
Recently, the Sa Jie team has been receiving a large number of inquiries about RWA projects, with underlying assets being quite diverse, including agricultural products, real estate, precious metals, and even some seemingly fantastical pure concept projects…
In fact, Sister Sa’s team has made it clear in previous articles that under the premise that China’s 9.4 announcement and 9.24 notice are still in effect, in addition to the strict review of the Hong Kong Ensemble sandbox and the RWA projects issued under the supervision have a certain “anti-criminal risk ability”, other types of RWA are very dangerous (especially the RWA projects issued to residents in mainland China).
Therefore, today the Sa Jie team will directly clarify which mainland assets can be used in the Hong Kong sandbox and which assets cannot be used, so that partners can conduct their business more efficiently and save on consultation fees.
01 Basic Understanding: Restrictions and Criteria for Judging Mainland Assets as RWA
First, it is clear that the “physical entity” located in mainland China and primarily operating for mainland residents is an asset that can be used for RWA. Several successful RWA projects in the past have already proven this point.
However, there are indeed restrictions for assets located in mainland China to issue RWA in Shahe, Hong Kong. According to the practical experience of Sister Sa’s team, the following three types of assets cannot be made into RWA:
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Assets that do not comply with the legal regulations of Hong Kong.
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Assets that do not comply with the laws and regulations of mainland China;
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Assets that are not suitable for issuance in Hong Kong at this stage.
Mainland assets issued RWA in Hong Kong must comply with the “dual compliance principle”.
In fact, this logic is quite easy to understand. The assets are located in mainland China, but the tokenized assets are actually issued and operated in Hong Kong. The entire financing chain spans both mainland and Hong Kong, so it naturally needs to comply with the “dual compliance principle”—the underlying assets must be compliant in mainland China as well as in Hong Kong.
- Hong Kong regulatory aspects
Given that Hong Kong is primarily responsible for asset tokenization and financial operation in RWA projects, we need to pay special attention to the legal regulations related to financial supervision in Hong Kong regarding the requirements for underlying assets when issuing financial products, such as the Securities and Futures Ordinance, the Banking Ordinance, the Insurance Ordinance, and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.
The Sa Jie team has previously stated that currently, Hong Kong in our country has not issued and regulated clear normative legal documents regarding RWA, and is still in the exploratory stage. Therefore, the current RWA projects still face the situation of “one project, one discussion” during the review process of sandbox regulation. However, the absence of clear normative legal documents does not mean that everyone has to cross the river by feeling the stones. By grasping the consistent regulatory principles for financial assets in Hong Kong and referring to the specific issuance rules of similar financial products, the success rate can be greatly improved.
In principle, Hong Kong has always adopted the “principle of substantive supervision” (or “perspective supervision”) for financial assets, which means that compliance depends on the substance of the asset rather than the shell, and it is not feasible to cover up the illegal core with the appearance of compliance. In terms of specific specifications, it is necessary to judge according to the regulatory rules applicable to the physical assets corresponding to the RWA. For example, if the underlying asset is a bond, then the review of the underlying asset is governed by the Securities and Futures Ordinance of Hong Kong and related regulatory documents.
- Mainland regulatory aspects
Since the underlying asset of the tokenized “physical body” is in the mainland, it is crucial to focus on the legality of the underlying asset itself and the legality of the operational methods, which needs to be viewed from two aspects.
Regarding the legality of the underlying assets themselves, based on my country’s Civil Code and relevant judicial interpretations and practical experiences, the classification of objects can be divided into three types according to whether they can circulate and the scope in which they can circulate:
circulating goods
Restricted circulation goods
Prohibited circulation items
Circulating goods refer to items that are legally permitted to circulate freely among civil subjects; restricted circulating goods refer to items that have certain limitations on their circulation scope and extent as mandated by law; prohibited circulating goods refer to items that are expressly prohibited from circulation and transfer by law. In the opinion of the Sa Jie team, goods used for RWA should be “circulating goods” or “restricted circulating goods” that are permitted for circulation.
In practice, “restricted circulation items” generally include:
“Prohibited circulating items” generally include:
In terms of the legality of operational methods, because the Hong Kong region of our country has cash flow requirements for RWA projects (currently issued projects all have actual application scenarios in commercial projects), the underlying assets also need to comply with the legal regulations of our country at the operational level: stay away from red lines and obtain the necessary administrative permits for operation.
At this stage, it is not suitable to issue assets in Hong Kong.
This type of asset itself meets the requirements of the “dual compliance principle”, but it is not suitable for issuance in Hong Kong at this stage.
On one hand, the RWA in Hong Kong is still in the sandbox experiment stage, so there is caution in the selection of underlying assets. The types of underlying assets explicitly recommended are those with “high-tech” and “clean and green” attributes. Therefore, the Sa Jie team believes that, at this stage, to issue an RWA project in Hong Kong, the underlying assets must at least meet one of the two aforementioned criteria. For example, carbon emission rights, while not having a physical form, are closely related to property rights in the green economy.
On the other hand, some assets that are intended to be revitalized through RWA and cannot generate good cash flow are also not suitable for RWA in the Hong Kong sandbox, due to low probability. For example, certain real estate with low economic value, no matter how much they are “empowered” through emerging concepts, cannot change the reality that the market value of the asset itself is gradually declining. The possibility of issuing RWA for such assets is very low.
02 These specific mainland assets basically cannot be used as RWA…
After understanding the principles and standards for determining whether underlying assets can issue RWA, we will provide a centralized Q&A for assets that have been frequently inquired about recently or those that need to be discussed separately, in order to save consultation costs for everyone.
Jewelry and collectibles RWA
Jewelry and cultural artifacts RWA is a category that receives a lot of inquiries, and it is also the most difficult to provide clear legal opinions on such RWA projects. This is mainly due to the variety of jewelry and cultural artifacts, the depth of the market, and the various special restrictions scattered across laws, judicial interpretations, administrative regulations, departmental rules, and national standards. For uncommon categories, it generally requires extensive legal research to provide opinions. Overall, at this stage, it is not recommended to use jewelry and cultural artifacts as underlying assets for RWA.
If partners’ assets fall into the following situations, they can be vetoed with one vote:
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Gem products with gambling nature. Simply put, they are those whose quality cannot be judged from the surface and can only be known by cutting, such as jade rough, unpeeled turquoise rough, uncut pearls, etc.
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Processed jewelry and gemstones, such as B-grade jade, C-grade jade, etc;
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Countries prohibit the sale of biological products (organic gemstones), such as ivory, hornbill products, conch, queen conch, coral, rhino horn, tortoiseshell, copal resin, seaweed, amber pillows, amber powder, cinnabar, etc.;
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Low-quality or processed jadeite or jade imitations, such as sodalite jade, Guatemalan jade, and heated jade, etc.
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Countries such as those with pure gold and pure silver have specific laws that restrict or prohibit the circulation of precious metals.
Intellectual Property RWA
Intellectual property, such as copyrights, trademarks, and patents, has actually seen a multitude of projects in the overseas cryptocurrency space. In fact, there are already several film and television projects that have achieved quick financing through tokenization. Currently, we have not seen any successful cases in Hong Kong’s RWA projects, but the Sa Jie team believes that intellectual property is not an unexploitable underlying asset for RWA. Each specific project should be analyzed individually. If the intellectual achievement does have significant commercial value, it can be boldly attempted to ‘break through’ after regulatory norms are clarified.
Agriculture and Agricultural Products RWA
“Can Sunlight Green Grapes be used for RWA?” Not long ago, a friend brought promotional materials for a similar grape project RWA from a domestic company to consult with the Sajia team. We do not comment on specific projects, but if we look at agricultural and agricultural product RWA projects in an abstract way, if the project meets the standards of technological ethics review, has a high technological content and research value, and possesses good commercial value, it can also boldly attempt to “break through” after regulatory norms are clarified.
Pure Conceptual RWA
Partners must understand one thing clearly: RWA is not crowdfunding. For such projects, the Sajia team usually gives a direct veto.
03 Written at the End
To extend a bit: For the “physical body” of underlying assets that are neither on the mainland nor in Hong Kong, can they apply for RWA in Hong Kong? The team led by Sister Sa believes that there are currently no regulations stating that assets must be located in certain places to apply for Hong Kong RWA. From the perspective of Hong Kong’s positioning as an “international financial center,” the location of the underlying assets should not be a hindrance to RWA. Authenticity, credibility, compliance, and investment value are the hard indicators.
