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

Recently, there has been a surge in consultation demands regarding the tokenization of physical assets ( RWA ) projects, involving a wide variety of underlying assets, from agricultural products to real estate, precious metals, and even some conceptual projects. It is worth noting that under the current regulatory environment, aside from RWA projects that are strictly reviewed and issued under regulation through the Hong Kong sandbox, other types of RWA projects carry a higher risk, especially those targeting residents in mainland China.

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

Basic Understanding and Judging Criteria for Onshore Assets as RWA

First, it is necessary to clarify that assets located in mainland China and primarily operated for mainland residents can be used for RWA, as confirmed by previous successful cases.

However, there are indeed some restrictions on the issuance of RWA in the Hong Kong sandbox for mainland assets. 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 regulations of mainland China
3. Currently, it is not suitable to issue assets in Hong Kong.

The "dual compliance principle" for mainland assets issuance of RWA in Hong Kong

Considering that the assets are in mainland China, but the tokenized assets are issued and operated in Hong Kong, the entire financing chain spans both locations, so it is necessary to adhere to the "dual compliance principle" - the underlying assets must be compliant in both mainland China and Hong Kong.

Hong Kong regulatory aspects

Hong Kong is still in the exploratory stage regarding the issuance and regulation of RWA, currently adopting a "one project, one discussion" review approach. Nevertheless, understanding Hong Kong's consistent regulatory principles for financial assets and referring to the specific issuance rules of similar financial products can greatly improve the project's success rate.

Hong Kong adopts a "substantive regulatory principle" for financial assets, focusing on the substance of the asset rather than its shell. Specific regulations need to be assessed based on the regulatory rules applicable to the physical assets corresponding to RWA.

Mainland regulatory aspects

Regarding the legality of the underlying assets themselves, objects can be divided into three categories:

1. Circulating Objects: Items that are legally permitted to circulate freely.
2. Restricted circulation items: Items whose circulation scope and extent are subject to certain legal limitations.
3. Prohibited circulating items: items that are explicitly prohibited by law from circulation and transfer.

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

In terms of operations, the underlying assets need to comply with Chinese legal regulations: stay away from the red line and obtain the necessary administrative permits.

Assets are not suitable for issuance in Hong Kong at this stage.

Although certain assets meet the "dual compliance principle", they may not be suitable for issuance in Hong Kong at this stage. Currently, the RWA projects in Hong Kong are still in the sandbox experimental phase, and there is a tendency to choose assets with "high-tech" or "clean green" attributes.

In addition, some assets that have difficulty generating good cash flow are also not suitable for RWA in the Hong Kong sandbox, such as certain real estate with low economic value.

Specific Mainland Assets Not Suitable for RWA

jewelry and cultural artifacts

Overall, at this stage, it is not recommended to use jewelry and cultural items as the underlying assets for RWA. The following situations can be directly dismissed:

1. Gemstone products with gambling attributes
2. Processed jewelry and gemstones
3. National prohibition on the sale of biological products
4. Low-quality or processed jadeite or jadeite imitations
5. Countries such as those with pure gold, pure silver, and other precious metals have specific laws restricting or prohibiting circulation.

intellectual property

Currently, there have been no successful cases in the RWA projects in Hong Kong, but the possibility of future exploration cannot be ruled out. If a certain intellectual achievement indeed has significant commercial value, it can be attempted after regulatory norms are clarified.

agriculture and agricultural products

If the project meets the standards for scientific and technological ethics review, has a high technological content and research value, and has good commercial prospects, it may also be considered for trial after the regulatory norms are clarified.

Pure Conceptual Type

Such projects are usually directly rejected because RWA is not equivalent to crowdfunding.

Conclusion

There are currently no regional restrictions for underlying assets that are not located on the mainland or in Hong Kong. From the perspective of Hong Kong's positioning as an "international financial center", the 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.