Hong Kong RWA Project Underlying Asset Selection Guide: Compliance and Applicability Analysis

Recently, we have received a large number of inquiries regarding the RWA project, involving a wide variety of underlying assets, including agricultural products, real estate, precious metals, and even some purely conceptual projects.

In the current regulatory environment, apart from RWA projects issued through the Hong Kong Ensemble sandbox, which undergo strict scrutiny and are regulated, other types of RWA carry higher risks, especially those issued to residents of mainland China.

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

01 Basic Restrictions and Judgment Criteria for RWA of Mainland Assets

First of all, assets that are located in mainland China and mainly operate for mainland residents can do RWA, which has been confirmed by previous successful cases.

However, there are indeed some limitations for mainland assets issuing RWA 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 regulations of mainland China.
3. The current stage is not suitable for the issuance of assets in Hong Kong.

Mainland assets issued RWA in Hong Kong must comply with the "dual compliance principle"

As the assets are located on the mainland, but the tokenized assets are sold and operated in Hong Kong, the entire financing chain crosses two regions, thus it is necessary to comply with the legal regulations of both the mainland and Hong Kong.

1. Hong Kong Regulations

Hong Kong is primarily responsible for the tokenization and financial operation of assets, so special attention needs to be paid to the requirements of financial regulatory laws regarding the underlying assets, such as the Securities and Futures Ordinance, the Banking Ordinance, the Insurance Ordinance, and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

Although Hong Kong has not yet issued clear legal documents regarding RWA issuance and regulation, understanding Hong Kong's consistent regulatory principles for financial assets and referring to the specific issuance rules for similar financial products can greatly improve the success rate.

Hong Kong adopts the "substantive regulatory principle" for financial assets, which means judging compliance based on the substance of the asset rather than its appearance. Specific regulations need to be determined according to the regulatory rules applicable to the physical assets corresponding to RWA.

2. Mainland Regulatory Aspects

Due to the underlying assets being located on the mainland, it is necessary to focus on the legality of the assets themselves and the legality of the operational methods.

According to the Civil Code and relevant judicial interpretations, objects can be divided into three categories: circulating objects, restricted circulating objects, and prohibited circulating objects. Objects used for RWA should be "circulating objects" or "restricted circulating objects" that are permitted to circulate.

In terms of operations, due to Hong Kong's cash flow requirements for RWA project underlying assets, the operation of the underlying assets must also comply with mainland legal regulations, avoid red lines, and obtain the necessary administrative permits.

The current stage is not suitable for the issuance of assets in Hong Kong.

Although certain assets may meet the "dual compliance principle", they may not be suitable for issuance in Hong Kong at the current stage.

The types of underlying assets currently recommended in Hong Kong mainly possess "high-tech" or "clean and green" attributes. Therefore, the underlying assets should at least have one of these two characteristics, such as property rights closely related to the green economy, like carbon emission rights.

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

02 Specific types of mainland assets that are not suitable for RWA

Jewelry and Artifacts

The consultation volume for RWA projects related to jewelry and cultural artifacts is relatively high, but it is also the most challenging to provide clear legal opinions on. This is mainly because there is a wide variety of jewelry and cultural artifacts, and the relevant regulations are scattered across various laws and regulations. Overall, at the current stage, it is not recommended to use jewelry and cultural artifacts as the underlying assets for RWA.

The following situations can be directly vetoed:

1. Gem products with gambling nature, such as jade raw stones, unpeeled green pine raw stones, etc.
2. Processed gemstones, such as B-grade jade, C-grade jade, etc.
3. The country prohibits the sale of biological products, such as ivory, rhinoceros horn, etc.
4. Low-quality or processed jadeite or imitation products
5. Precious metals such as pure gold and pure silver are subject to specific laws in certain countries that restrict or prohibit their circulation.

Intellectual Property

Although no successful cases have been seen in the Hong Kong RWA project so far, intellectual property is not an unexploitable underlying asset. If the intellectual achievement indeed holds significant commercial value, it may be worth attempting to "break through" after regulatory standards are clarified.

Agriculture and Agricultural Products

For agricultural and agricultural product RWA projects, if they have high technological content, scientific research value, and good commercial value under the premise of meeting the ethical review standards of technology, they can also try to "break through" after the regulatory norms are clarified.

Pure Concept Type

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

03 Conclusion

For "physical" underlying assets that are neither on the mainland nor in Hong Kong, can they apply for RWA in Hong Kong? Currently, there are no clear regulations that state assets must be in a specific location to apply for Hong Kong RWA. From the perspective of Hong Kong as an "international financial center", the geographical location of underlying assets should not be an obstacle; the key lies in whether the assets themselves are real, credible, compliant, and have investment value.