A new perspective on RWA? Listen to what the regular army in Hong Kong has to say.
New perspective on RWA from Hong Kong's regular army.
This sharing session invited three guests from well-known Hong Kong virtual asset institutions, namely:
- Junfei – CEO of PanFund
- Wang Yi – Director of Southern Dongying Quantitative Investment Team
- Marco Lim – Managing Partner of MaiCapital
1. In Hong Kong, how should RWA be regulated? Can it be open to retail investors?
RWA stands for Real World Asset. The concept one generation before RWA was STO (Security Tokenization Offering). RWA is undoubtedly a very popular concept in the current market. Not only are many capital and venture capital institutions actively laying out, but some regulatory authorities are also paying attention.
On July 6th this year, officials from the Hong Kong Securities and Futures Commission mentioned that the understanding of RWA by regulators is continuously changing. In the past, it was believed that everything tokenized was virtual assets and should be regulated as such. However, it is now believed that RWA and STO should be regulated according to the regulatory approach of their underlying assets. This is indeed very encouraging news because if RWA or STO is based on stocks as underlying assets and is regulated according to the regulatory approach of the underlying assets, does it mean that this RWA can be open to retail investors?
Wang Yi: The regulatory principle in Hong Kong is “Same Principle, Same Practice”. Their attitude towards RWA, in my personal understanding, is just to fulfill their own regulatory principles. As for the virtual side, whether RWA becomes a token and is subject to additional regulation, it may also depend on the regulation of the virtual asset side and then be nested in it.
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Of course, if the underlying assets of RWA are deposits, bonds, stocks, or even a building, there may be corresponding regulation in the real asset world. This just tells us where to look (corresponding regulatory provisions), but it does not strictly mean that it can definitely be provided to retail investors or to anyone.
Marco: I agree. For example, Hong Kong recently issued a green bond, which can actually be sold to retail investors, but it has been tokenized. So if the asset was already available for retail investors to purchase in the traditional market, after tokenization, retail investors can also purchase it.
So it’s actually the same principle, that is, if a product is only open to professional investors in the traditional market, then after tokenization, only professional investors can purchase it. But if the product is already open to retail investors in the traditional market, even if it is tokenized, retail investors can immediately purchase it.
Junfei: In fact, the term RWA did not exist until last year. Even from the perspective of on-chain data, the market share related to tokenization was relatively small before 2022. Starting from this year, suddenly this market share has increased significantly.
I think it also depends on the underlying assets. Whether it is tokenization or real-world assets, it depends on what kind of assets it represents. Is it tangible or intangible?
If it’s assets like USDT, real estate, or certain types of collectible NFTs, it’s possible that regulators are still unsure whether or not to manage them. However, if we’re talking about tangible assets, such as physical assets or traditional equity and debt assets, tokenizing them would clearly fall within the scope of regulation and must comply with Hong Kong’s regulatory requirements.
Chen: In the field of regulatory compliance in Hong Kong, licensed institutions are the closest to regulation and are most constrained by regulatory requirements in all investment activities. Therefore, their views are the ones we should refer to the most. All three guests provided a very clear guidance: the regulatory authorities’ thinking is relatively clear. The more important aspect of regulating virtual assets is to see which regulatory principles should be applied to their underlying real-world assets. If the underlying asset is real estate, it may not be regulated by the Securities and Futures Commission; if the asset is to be securitized, there may be some controversial aspects, such as whether it is indeed a security; if the underlying asset is originally regulated by the Securities and Futures Commission, such as stocks, bonds, funds, and other similar assets, theoretically, they should be regulated according to their existing principles.
II. Why would ordinary users be willing to purchase RWA?
For ordinary investors, they already have normal channels and a large number of issued coins to purchase assets such as stocks, bonds, and funds. To purchase tokenized assets, they would need to convert fiat currency into stablecoins (such as USDT and hypothetical digital Hong Kong dollars), and just this process alone incurs friction costs. It is not a smooth path for ordinary users. So why would ordinary users choose to purchase these types of assets?
Wang Yi: In traditional financial investments, people invest in something with corresponding returns and risks. In fact, this is the same whether it is in virtual world investments or traditional financial investments. So why is RWA so popular? In fact, people rarely consider: what is the most stable and secure return in virtual assets? In terms of a currency-based perspective, the safest investment in a currency-based system is not DeFi, but Staking (mining).
The annualized return rate of mining Ethereum is actually lower than the short-term return rate of the US dollar. There is a shocking case: in the RWA track in the United States, there is a project that deals with US government bonds. After tokenizing the US government bonds, they tokenized 1.2 billion US dollars within three months. The return on holding this bond token is only about 3.8. So why are so many people willing to buy it? It’s because they can still use it for Staking. In other words, users purchase a token on this RWA platform, which is similar to a “transformed USDT” government bond, and it generates its own returns. At the same time, users can also use this token for mining, which means that their returns will be accumulated. Therefore, the minimum risk-free return that an RWA can generate exceeds the risk-free return of existing fiat currency, which is why there is such a high demand for it.
This approach has actually had many cases before, such as FTX tokenizing Tesla. At that time, Tesla was also very popular, so why would people still want to buy a tokenized Tesla? Is there any additional income? In fact, if it can generate additional income and this income is guaranteed, it can become a major factor attracting investors to purchase this token in the virtual world. So from the perspective of risk-free returns, if it can beat what is available in the market, or even beat the risk-free returns in the virtual world, then it is valuable.
Of course, many people also believe that assets that cannot be liquidated, such as real estate, should be tokenized so that people can buy fragmented assets. This is also one perspective of RWA. However, currently, the RWA cases in the market are difficult to achieve a large scale. The key issue is that when people invest, they always make horizontal comparisons. Among assets with the same attributes, they prefer the one that has risk-free excess returns and these excess returns can exceed the original investment assets available in the market. With such assets, people have the motivation to turn to the virtual world.
In the past, there was asset securitization, and now it may be asset virtualization. I hope that asset virtualization can bring more liquidity to the trading side, have more participants, investors, and make it more convenient for users. However, in principle, the scale of virtual assets is far from what fiat society needs, but it has a relatively convenient aspect. This aspect can turn it into Real Value within a rigorous range and be able to prove its Real Value. Of course, if users are willing to take high risks and earn annualized returns of 20%, 50%, or even 100% in DeFi after investing, that’s another story.
So in some aspects, I am very optimistic about RWA because it can really achieve this and attract investors.
Chen: From this perspective, this model can indeed be applied to many different risk levels of asset categories.
Marco: That’s right. In the past, when doing STOs and fragmenting funds, we hoped to find more investors, but we encountered two problems. First, users could originally use fiat currency to purchase these funds, and second, the circulation volume (such as RWA) is not large. But if the risk-free returns can be slightly higher than that of virtual currencies, it can already attract many investors. Just like what Mr. Wang said, after staking, the return is 4.5, and if we add some DeFi or leverage, the return can already reach 7 to 8, which is actually a very attractive return. So many people hope to pursue such RWAs.
So our approach to finding RWAhas always been wrong, in the past we just wanted to tokenize real estate or other similar assets , but now it has given us a great opportunity, which is to tokenize some traditional risk-free assets and put them in the coin circle, which may yield greater returns.
Chen: So actually the most attractive thing about this is that it touches upon a risk-free asset at its underlying level.
Marco: That’s right. No one used to pay attention to RWA because back then, any coin in the coin circle could rise significantly, so no one would look at stable and risk-free assets. But now the entire worldview has changed, and when people invest, they may prefer to put their money in risk-free assets and hope to get the highest return. That’s why everyone is looking at more stable RWAs.
JunFei: I think it also depends on the situation because money is always the smartest, it always flows towards the asset class it believes has the potential for appreciation. Now, after the US Federal Reserve raised interest rates, the cost of funds in both Hong Kong dollars and US dollars has become very high. In the case of high borrowing costs, this allows users to not only speculate on coins but also speculate on stocks. Users can also invest this money in some asset allocations.
Chen: When the previous generation understood STO and RWA, it was mainly about tokenizing real-world assets or commodity assets. Because these assets may have poor liquidity when they are transferred or sold due to their large size, when the previous generation discussed RWA and STO, they focused more on how to provide custody and how to establish ownership rights. Now that there are more technologies and successful cases in this category, we have discovered that the underlying assets can be stocks, bonds, and other fragmented assets themselves, and there are more alternative forms. So actually, the popularity of RWA in this round is not just about speculation, but rather about the change in the structure of the entire market and the current economic cycle, which allows everyone to discover that this thing has more achievable value.
JunFei: It is mainly because RWA is now included in the Hong Kong regulatory framework. Previously, when trading RWA, people could not confirm whether the platform had actually purchased the asset for them. Because most platforms are unlicensed and only issue tokens to users, the credit is only endorsed by the platform. If the platform does not help users make the purchase, once the platform has problems, users will find that these so-called real-world assets do not actually belong to them. There are only two ways to solve this problem: one is to fully tokenize the assets, so that users can see the on-chain data on DeFi; the other is to comply with Hong Kong regulations.
III. How to Enter the RWA Space Under Regulatory Compliance?
Since RWA involves real-world assets (physical assets, stocks, securities, etc.), it inevitably involves “ownership rights”. And once ownership rights are involved, at least in the real world, it becomes a legal issue, rather than a discussion of decentralized trustless mechanisms in the Web3 or DeFi fields. When discussing it from a legal perspective, the value of compliance and regulation becomes prominent. I want to ask if anyone has thought about how to enter the RWA space under an already recognized and regulated identity?
Marco: I think a possible entry point could be to “manage relatively low-risk funds”, such as purchasing government bonds or some monetary funds through a licensed institution. But this encounters a problem that has always been difficult to handle – KYC, because in the end, we still use traditional methods to conduct KYC. So what Hong Kong regulatory authorities may recognize is not KYT or other methods on-chain, but the need for licensed institutions to conduct KYC. In other words, it is difficult for some licensed institutions with funds of unclear origin to access funds in the virtual currency space.
Chen: In other words, compliance is both an advantage and a restriction for licensed institutions. But we still need to look at it from a developmental perspective because regulatory agencies and officials are also constantly evolving and iterating, and their understanding of the track and related products is also constantly changing.
Marco: So, if we really have RWA, only coins that have already undergone KYC can be used to purchase RWA. It may be difficult for us to access stablecoins that have not undergone proper KYC/KYT. Therefore, from the perspective of Hong Kong’s regulations, stablecoins in Hong Kong could be a gateway in the future, which we can open up and allow virtual currency funds to directly purchase RWA.
JunFei: I think the asset market is quite segmented now, divided into the fiat world and the virtual asset world. In the fiat world, trading with fiat currencies is very free-flowing, while in the virtual asset world, trading with USDC and others is also very free for token-to-token transactions. It’s not that there is no bridge between the two worlds, but the cost is relatively high. So, as asset managers, if licensed institutions want to cross the bridge, it may not make much sense from a business perspective, and they may choose to use some third-party institutions instead. However, in the future, the bridge will definitely become wider and the cost will become lower.
4. What can be done in the framework of the No. 9 license on the track of RWA?
JunFei: For an asset management company, the first thing is to seize the track with the greatest dividends and the greatest potential for future growth, and then select the most promising companies or asset categories within the track. A large part of the assets targeted by PanDu Fund are in the field of emerging assets, such as innovative stocks/bonds/virtual assets related to blockchain, Web3, AI, etc. In fact, regulation provides a lot of information, especially when there are changes after the original regulation, which often creates significant opportunities. Hong Kong itself is enjoying the regulatory dividend, and many places do not have plans for financial innovation, so this is an opportunity for Hong Kong itself. Since we have obtained the license as one of the first pioneers in Hong Kong, this is also our small opportunity to create greater value and returns for users and provide better financial products as much as possible.
Wang Yi: RWA itself refers to Real World Asset. As traditional finance, we have actually issued a large number of ETF products, including a series of currency, market funds, government bonds, stocks, futures, etc. As the holder of the No. 9 license, we can take a step back and bring real-world assets into it to help issuers and project parties in the Web3 field, because they have relatively limited experience in investing in traditional finance/traditional assets. Therefore, the No. 9 license organization can easily act as a bridge to handle the asset side of RWA, and as for how to become the token side, it can be done together with partners, which is actually a better way.
However, in the opposite direction, the No. 9 license organization also needs to know what points can attract investors after the asset is tokenized. First, it needs to be able to tell investors the advantages of the product in a concrete way, and second, it needs to bring real returns to others. In other fields, there needs to be a basic understanding of the field, knowing how things work and what kind of returns can be earned. So we often deal with different partners and try to understand different fields (taking RWA as an example, how does it bring profits to customers, is it feasible). What we need to do is to do our part well, and on this basis, everyone will see the gradual development of the entire market.
Marco: Over the years, almost all of our customers have been traditional finance people who want to invest in virtual assets. But this year is different. Many investors who hold virtual currency assets are looking for channels to invest in traditional assets. These customers actually do not want to convert their virtual assets back into fiat currency because the friction costs in the process are very high. They hope to hold stablecoins and invest in some traditional assets, and in the process, they may also be able to use them as collateral for mining and earn money on both sides. So, in the past, we helped traditional asset holders enter the crypto market, but this year, we may see more people from the crypto market entering traditional assets.
However, the most traditional assets may be some risk-free investments. The demand already exists, but the work has not been done well under the regulation in Hong Kong. So this year we will make efforts to do it well. Actually, this does not require the regulation to relax in certain aspects. What we need to do is to make the regulators believe that these investors have already completed KYC and KYT. They just don’t want to convert back to fiat currency, which doesn’t mean they cannot invest in traditional assets. The friction cost of converting back to fiat currency is too high, and it is difficult for these clients to return to the cryptocurrency market. So I think this is something we need to communicate with the regulatory agencies in Hong Kong when we do Web3. Of course, we cannot do it alone. We also need partners and hope to cooperate to develop RWA.
