Recently, there has been a lot of discussion about RWA projects in the Web3 community. Industry observers often put forward the thesis that "RWA will reconstruct Hong Kong's new financial ecology", believing that relying on the existing regulatory framework of the Hong Kong SAR, the track will usher in breakthrough development. In the process of communicating and discussing with the majority of colleagues, we found that everyone has been arguing about the so-called "compliance" issue recently, and their understanding of the question of "what is compliance" is also different. This phenomenon is actually based on the fact that there are still differences in the understanding of the concept of RWA.
Therefore, it is necessary for the encryption salad to discuss from the perspective of a professional legal team how the concept of RWA should be defined and to clarify the compliance red lines of RWA.
1. How should the concept of RWA be defined?
(1) Background and Advantages of RWA Projects
Currently, RWA is becoming the focus of market discussions and is gradually forming a new wave of development. This phenomenon is mainly based on the following two major backgrounds:
One reason is that the advantages of the tokens themselves can compensate for the shortcomings of traditional financing.
Traditional financial markets face inherent shortcomings such as high entry barriers, long financing cycles, slow financing speeds, and complex exit mechanisms. However, token financing can precisely avoid these defects. Compared to traditional IPOs, RWA has the following significant advantages:
1. Fast financing speed: Due to the circulation of tokens based on blockchain technology, which usually circulates in decentralized intermediary trading institutions, it avoids obstacles such as foreign investment access restrictions, industry policy constraints, and lock-up period requirements that traditional financial projects may encounter. At the same time, it can also compress the review process that originally took months or even years, greatly improving the financing rate.
2. Asset Diversification: Traditional IPOs have a single type of asset, only supporting equity issuance, thus imposing strict requirements on the revenue stability, profitability, and capital structure of the issuer. However, for RWA, the types of suitable assets are more diverse, encompassing various non-standard assets, which not only expands the range of financing assets but also shifts the focus of credit assessment to the quality of underlying assets, significantly lowering the qualification threshold for the issuer.
3. Relatively Low Financing Costs: Traditional IPOs require long-term collaboration from multiple intermediary institutions such as investment banks, auditors, and law firms, with the total cost of the listing process potentially reaching millions or even tens of millions. However, RWA issues tokens through decentralized exchanges, eliminating a significant amount of intermediary fees, while also reducing another large portion of labor costs through the use of smart contracts.
In summary, RWA has taken the spotlight in financing projects with its unique advantages, while the Web3 world and the cryptocurrency market particularly need funds and projects from the traditional real world. This has led to the current situation where, whether aiming for substantial business transformation or simply wanting to ride the "wave" and gain attention, leading projects in the segmented fields of listed companies and various quirky startups at the grassroots level are actively exploring the application possibilities of RWA.
Secondly, Hong Kong's "compliance" has added fuel to the heat.
Actually, the development of RWA overseas has been underway for a while. The recent surge in interest is due to a series of regulatory innovations passed in Hong Kong, which have implemented several benchmark projects, providing domestic investors with a compliant channel to participate in "RWA" for the first time. The "compliant" RWA that the Chinese can access has been realized. This groundbreaking progress not only attracts native encryption assets but also encourages traditional sector projects and funds to begin paying attention to the investment value of RWA, ultimately driving market enthusiasm to new heights.
However, do users who want to experience RWA really understand what RWA is? There are various RWA projects with different underlying assets and operational structures; can everyone distinguish their differences? Therefore, we believe it is necessary to clearly define what compliant RWA is through this article.
People generally believe that RWA is a financing project that tokenizes underlying real-world assets through blockchain technology. However, when we examine the underlying assets of each project in detail and trace back the process of project operation, we find that the underlying logic of these projects is actually different. We conducted a systematic study on this issue and summarized the following understanding of the concept of RWA:
We believe that RWA is actually a broad concept and does not have a so-called "standard answer." The process of asset tokenization achieved through blockchain technology can all be referred to as RWA.
(2) Elements and Characteristics of RWA Projects
Real RWA projects need to have the following characteristics:
1. Based on real assets
The authenticity of underlying assets and whether the project party can establish a transparent and acceptable off-chain asset verification mechanism through third-party auditing is a key basis for determining whether the project's token will achieve effective value recognition in reality. For example, PAXG, which issues tokens that are anchored to gold in real-time, with each token backed by 1 ounce of physical gold, and the gold reserves managed by a third-party management platform, undergoing quarterly audits by a third-party auditing company, even allowing token holders to redeem a corresponding amount of physical gold. This highly transparent and regulated asset verification mechanism enables the project to gain the trust of investors and provides a foundation for effective valuation within the real financial system.
2. Asset Tokenization on Chain
Asset tokenization refers to the process of converting real-world assets into digital tokens that can be issued, traded, and managed on the blockchain through smart contracts and blockchain technology. The value flow and asset management process of RWA are automatically executed through smart contracts. Unlike traditional financial systems that rely on intermediaries for transactions and settlements, RWA projects can leverage smart contracts to achieve transparent, efficient, and programmable business logic execution on the blockchain, thereby significantly enhancing asset management efficiency and reducing operational risks.
Asset tokenization endows RWA with key characteristics of being divisible, tradable, and highly liquid. After asset tokenization, assets can be split into small tokens, lowering the investment threshold and changing the ways assets are held and circulated, allowing retail investors to participate in the originally high-threshold investment market.
3. Digital assets have ownership value
The tokens issued by RWA projects should belong to digital assets with property attributes. Project parties should clearly distinguish between data assets and digital assets: data assets are a collection of data owned by enterprises that can create value. In contrast, digital assets are the value itself and do not need to be repriced through data. To illustrate, when you design a painting, upload it to the blockchain, and generate an NFT, this NFT is a digital asset because it can be authenticated and traded. However, the large amount of user feedback, browsing data, click rates, and other data you collect regarding this painting belong to data assets. You can analyze data assets to understand user preferences, improve your work, and adjust its price.
4. The issuance and circulation of RWA tokens comply with legal regulations and are subject to administrative supervision
The issuance and circulation of RWA tokens must be operated within the existing legal framework, otherwise it may not only lead to the failure of the project, but also may lead to legal risks. First of all, real-world assets must be real, legitimate, and have clear ownership without disputes, so that they can serve as the basis for token issuance. Second, RWA tokens usually have income rights or asset interests, which can easily be recognized as securities by regulators in various countries, so they must be handled in compliance with local securities regulations before issuance. The issuer must also be a qualified institution, such as holding an asset management or trust license, and complete KYC and anti-money laundering procedures. After entering circulation, the trading platform of RWA tokens also needs to be regulated, usually requiring a compliant exchange or a secondary market with a financial license, and no random transactions on decentralized platforms are allowed. In addition, information disclosure is required on an ongoing basis to ensure that investors have access to the true picture of the assets linked to the token. Only under such a regulatory framework can RWA tokens be legally and safely issued and circulated.
In addition, RWA's compliance management has typical cross-jurisdictional characteristics, so it is necessary to build a systematic compliance framework covering the legal norms, capital flow paths, and various regulatory authorities where the assets are located. In the whole life cycle of asset on-chain, cross-chain, and cross-border and cross-platform circulation of tokens, RWA must establish a compliance mechanism covering multiple links such as asset confirmation, token issuance, capital flow, income distribution, user identification, and compliance audit. This involves not only legal advice and compliance design, but may also require the introduction of third-party trust, custody, auditing, and regulatory technology solutions.
(3) Types and Regulation of RWA Projects
We found that there are two parallel types in the eligible RWA projects:
1. Narrow definition of RWA: Physical assets on-chain
We believe that the narrow definition of RWA specifically refers to projects that tokenize real assets with authenticity and verifiability on the blockchain, which is also the common understanding of RWA among the public. Its application market is the most extensive, such as projects that anchor tokens to offline real assets like real estate and gold.
2. STO (Security Token Offering): Financial Assets on the Blockchain
Apart from the narrowly defined RWA projects, we have found that a large number of RWA projects currently existing in the market are STOs.
(1) Definition of STO
According to the differences in underlying assets, operational logic, and token functionality, existing tokens in the market can generally be divided into two main categories: Utility Tokens and Security Tokens. STO refers to the financialization of real assets, issuing tokenized shares or certificates in the form of Security Tokens on the blockchain.
(2) Definition of Securities-type Tokens
Security tokens, in contrast to utility tokens, are, simply put, on-chain financial products driven by blockchain technology that are subject to securities regulations, similar to electronic stocks.
(3) Regulatory Framework for Security Tokens
Under the regulatory framework of mainstream encryption-friendly countries such as the United States and Singapore, once a token is identified as a security-type token, it will be subject to the constraints of traditional financial regulatory bodies (such as the Securities and Exchange Commission), and the design and trading model of the token must comply with local securities regulations.
From the perspective of economics, the core goal of financial products is to coordinate the supply and demand relationship between financiers and investors. From the perspective of legal regulation, some countries are more focused on protecting the interests of investors, while others are more inclined to encourage smooth and innovative financing behavior. This difference in regulatory stance is reflected in the specific rules, compliance requirements and enforcement levels of each country's legal system. Therefore, when designing and issuing RWA products, it is necessary not only to consider the authenticity and legitimacy of the underlying assets, but also to conduct a comprehensive review and compliance design of key links such as product structure, issuance method, circulation path, trading platform, investor access threshold and capital cost.
It is especially worth noting that once the core appeal of a certain RWA project comes from its high leverage and high return expectations, and positions "hundred-fold, thousand-fold returns" as its main selling point, then regardless of its superficial packaging, its essence is highly likely to be classified as a securities product by regulatory agencies. Once identified as a security, the project will face a much harsher and more complex regulatory framework, and its subsequent development path, operational costs, and even legal risks will be greatly increased.
Therefore, when discussing the legal compliance of RWA, we need to deeply understand the connotation of "securities regulations" and the regulatory logic behind it. Different countries and regions have different definitions and regulatory focuses regarding securities. The United States, Singapore, and the Hong Kong area have all defined the criteria for the identification of security tokens. It is not difficult to find that the identification method is essentially to determine whether the tokens comply with the local securities regulations' criteria for identifying "securities". Once the securities conditions are met, they are classified as security tokens. Therefore, we have organized the relevant provisions of key countries (regions) as follows:
A. Mainland China
Under the regulatory framework in mainland China, the Securities Law of the People's Republic of China defines securities as stocks, corporate bonds, depository receipts and other negotiable instruments recognized by the State Council that can be issued and traded. Additionally, the listing and trading of government bonds and shares of securities investment funds are also included in the regulations of the Securities Law.
(The above image is taken from the "Securities Law of the People's Republic of China")
B. Singapore
Although Singapore's "Digital Token Offering Guidelines" and "Securities and Futures Act" do not directly mention the concept of "security tokens," they detail different circumstances under which tokens may be recognized as "capital market products:"
(The above image is taken from "Digital Token Issuance Guide" )
C. Hong Kong, China
The Securities and Futures Commission of Hong Kong has specific enumerated provisions regarding the positive and negative lists of securities in the Securities and Futures Ordinance.
(The above image is taken from the Securities and Futures Ordinance )
The regulation defines "securities" to include structured products such as "shares, equity shares, notes, and bonds," and does not limit their existence to traditional carriers. The SFC has explicitly pointed out in the "Circular on Intermediaries Engaging in Tokenized Securities-related Activities" that the nature of its regulatory targets is essentially traditional securities packaged as tokens.
D. United States
The U.S. Securities and Exchange Commission (SEC) stipulates that any product that passes the Howey Test is classified as a security. Any product deemed a security must be regulated by the SEC. The Howey Test is a legal standard established by the U.S. Supreme Court in the 1946 case SEC v. W.J. Howey Co., used to determine whether a transaction or scheme constitutes an "investment contract," thereby subjecting it to U.S. securities law regulation.
The Howey Test lists four conditions under which financial products are deemed to be "securities." The application of the Howey Test in digital assets is outlined in the SEC's Framework for "Investment Contract" Analysis of Digital Assets. We will conduct a detailed analysis on this next:
The Investment of Money
It refers to the investor investing money or assets in exchange for some rights or expected returns to the project party. In the field of digital assets, whether a token is purchased with fiat currency or cryptocurrency, as long as there is a value exchange, this criterion can usually be found to be met. As a result, most token offerings largely meet this criterion.
Common Enterprise（共同事业）
"Joint venture" refers to a close binding of interests between investors and issuers, typically manifested as the investors' returns being directly related to the project's operational effectiveness. In token projects, if the returns of token holders depend on the business development or operational results of the project party, it meets the characteristics of a "joint venture". This condition is also relatively easy to establish in reality.
Reasonable Expectation of Profits Derived from Efforts of Others
This point is key to determining whether a token will be classified as a securities-type token. This condition means that if an investor purchases a product with the expectation of future appreciation or obtaining other economic returns, and such returns do not come from their own use or operational activities, but rather depend on the overall development of a project created by others' efforts, then such a product may be regarded as a "security."
Specifically, in RWA projects, if investors buy tokens for the purpose of obtaining future appreciation or economic returns, rather than the benefits from their own use or business activities, then the token may have a "profit expectation", which triggers the determination of the security attributes. Especially when the token's earnings are highly dependent on the professional operation of the issuer or project team, such as liquidity design, ecosystem expansion, community building, or cooperation with other platforms, this "reliance on the efforts of others" feature further strengthens its securitization possibilities.
RWA tokens that have sustainable value in the true sense should be directly anchored to the real returns generated by the underlying real assets, rather than relying on market speculation, narrative packaging, or platform premiums to drive their value growth. If the value fluctuations of the token primarily stem from the "recreation" by the team or platform behind it, rather than the income changes of the asset itself, then it does not possess the characteristics of "narrow RWA" and is more likely to be regarded as a security token.
The U.S. SEC has introduced the Howey Test in its regulation of encryption tokens, which means it no longer relies on the form of the tokens to determine its regulatory stance, but instead shifts to a substantive review: focusing on the actual functions of the tokens, their issuance methods, and investor expectations. This change marks a shift towards a stricter and more mature legal positioning of U.S. regulatory agencies regarding crypto assets.
2. What is the legal logic of the "compliance" tiering in RWA projects?
After discussing so much about the concepts and definitions of RWA, let's return to the core question raised at the beginning of the article, which is also a common focus of attention in the industry:
As RWA has developed to this day, which types of RWA can be considered truly "compliant" RWA? How can we meet the compliance of RWA projects in practice?
First, we believe that compliance means being regulated by local regulatory authorities and adhering to the provisions of the regulatory framework. In our understanding, the compliance of RWA is a layered system.
Layer One: Sandbox Compliance
This specifically refers to the Ensemble sandbox project designed by the Hong Kong Monetary Authority (HKMA), which is currently the narrowest and most regulatory pilot definition of "compliance." The Ensemble sandbox encourages financial institutions to explore technological and model innovations for tokenization applications through projects like RWA, in a controlled environment, to support the digital Hong Kong dollar project they lead.
The Hong Kong Monetary Authority (HKMA) has demonstrated a high level of emphasis on the sovereignty of future monetary systems in its promotion of the central bank digital Hong Kong dollar (e-HKD) and exploration of regulations for stablecoins. The competition between central bank digital currencies and stablecoins is essentially a redefinition and contestation of "monetary sovereignty." The sandbox provides project parties with a certain degree of policy space and flexibility, which is conducive to promoting exploratory practices for bringing real assets onto the blockchain.
At the same time, the Monetary Authority is actively guiding the development of tokenized assets, trying to expand their application in real scenarios such as payments, settlements, and financing within a compliant framework. Several technology and financial institutions, including Ant Group, are members of the sandbox community, participating in the construction of the digital asset ecosystem. Projects entering the regulatory sandbox imply a higher degree of compliance and policy recognition to a certain extent.
However, from the current situation, such projects are still in a closed operating state and have not yet entered the broader secondary market circulation stage, indicating that there are still practical challenges in terms of asset liquidity and market connectivity. Without a stable funding supply mechanism and efficient secondary market support, the entire RWA token system is difficult to form a true economic closed loop.
Second Layer: Hong Kong Administrative Regulatory Compliance
As an international financial center, Hong Kong Special Administrative Region has been continuously promoting institutional exploration in the field of virtual assets in recent years. As the first region in China to explicitly promote the development of virtual assets, particularly tokenized securities, Hong Kong has become a target market that many mainland project parties are eager to try, thanks to its open, compliant, and clearly defined regulatory environment.
By reviewing the relevant circulars and policy practices issued by the Hong Kong Securities and Futures Commission, it is not difficult to find that the core of Hong Kong's regulation of RWA is actually to incorporate it into the framework of STO for compliance management. Furthermore, the Commission has established a relatively complete licensing system for Virtual Asset Service Providers (VASP) and Virtual Asset Trading Platforms (VATP), and is preparing to publish the second virtual asset policy declaration to further clarify its regulatory stance and basic principles regarding the integration of virtual assets with real assets. Under this institutional framework, tokenization projects involving real assets, especially RWA, have been included in a higher level of compliance regulatory category.
From the current RWA projects that have been implemented in Hong Kong and have a certain market influence, most projects possess clear securities characteristics. This means that the tokens issued involve ownership, rights to income, or other transferable rights related to real assets, which can constitute "securities" as defined under the Securities and Futures Ordinance. Therefore, these types of projects must be issued and circulated through the method of Security Token Offering (STO) in order to obtain regulatory approval and achieve compliant market participation.
In summary, Hong Kong's regulatory positioning on RWA has become relatively clear: any mapping of real assets with securities attributes on the blockchain should be included in the STO regulatory framework. Therefore, we believe that the current development path of RWA promoted by Hong Kong is essentially a specific application and practice of the securities tokenization (STO) path.
Layer Three: A Clear Regulatory Framework for Encryption-Friendly Areas
In regions with an open attitude towards virtual assets and relatively mature regulatory mechanisms, such as the United States, Singapore, and some European countries, a more systematic compliance path has been established for the issuance, trading, and custody of encryption assets and their mapped real-world assets. RWA projects in such regions, if they can legally obtain the corresponding licenses and comply with information disclosure and asset compliance requirements, can be regarded as compliant RWAs operating under a clear regulatory framework.
Fourth Layer: "Pan-compliance"
This is the compliance in the broadest sense, which is opposite to "non-compliance". It specifically refers to RWA projects within certain offshore jurisdictions where the government temporarily adopts a "laissez-faire" attitude towards the virtual asset market, which has not been explicitly identified as non-compliant or illegal. Its business model has a certain degree of compliance space within the local legal framework. Although the scope and concept of this compliance are relatively vague and do not yet constitute complete legal confirmation, it falls under the business state of "what is not prohibited by law is allowed" before legal regulation becomes clear.
In reality, we can observe that the vast majority of RWA projects find it difficult to achieve the first two types of compliance. Most projects choose to attempt the first three paths—namely, relying on the lenient policies of certain encryption "friendly" jurisdictions to try to bypass sovereign regulatory boundaries and achieve formal "compliance" at a lower cost.
As a result, RWA projects have been implemented "like dumplings" on the surface, but the time point has not yet come to generate substantial financial value. The fundamental turning point will depend on whether Hong Kong can explore the secondary market mechanism of RWA – in particular, how to liberalise the cross-border flow of capital. If RWA trading remains confined to a closed market for local retail investors in Hong Kong, liquidity and funding will be extremely limited. To achieve a breakthrough, global investors must be allowed to invest in China-related assets through compliance mechanisms, indirectly "buying China" in the form of RWA.
Hong Kong's role here can be compared to the significance of Nasdaq for global technology stocks in the past. Once the regulatory mechanisms mature and the market structure is clear, when Chinese people want to "go abroad" for financing and foreigners want to "buy the dip" on Chinese assets, the first stop will definitely be Hong Kong. This will not only be a regional policy dividend but also a new starting point for the reconstruction of financial infrastructure and capital market logic.
In summary, we believe that the compliance of RWA projects should be done within the current scale, and all projects must maintain policy sensitivity, and once there is a legal adjustment, it must be urgently adjusted. While this means investing more resources and incurring higher time and compliance costs in the early stages of a project, it will significantly reduce systemic risks in the long run, including legal, operational, and even investor relations.
Among all the potential risks, the fundraising risk is undoubtedly the most lethal hidden danger for RWA. Once the project design is determined to be illegal fundraising, regardless of whether the assets are real or not, whether the technology is advanced or not, it will face major legal consequences, posing a direct threat to the survival of the project itself, and dealing a heavy blow to the assets and reputation of the enterprise. In the process of RWA development, there will inevitably be differences in the definition of compliance in different regions and different regulatory environments, and developers and institutions must formulate a phased compliance strategy in detail based on their own business type, asset attributes, and regulatory policies of the target market. On the premise of ensuring that the risks are controllable, the implementation of the RWA project can be steadily promoted.
3. Legal Advice on RWA Projects**
As a summary, we, as a legal team, systematically outline the core aspects that need attention from a compliance perspective during the comprehensive advancement of the RWA project.
1. Choose a policy-friendly jurisdiction
Under the current global regulatory landscape, the compliance advancement of RWA projects should prioritize jurisdictions with clear policies, mature regulatory systems, and an open attitude towards virtual assets, which can effectively reduce compliance uncertainty.
2. The underlying assets must have real redeemable capabilities
No matter how complex the technical architecture is, the essence of RWA projects is still to map the rights of real assets onto the chain. Therefore, the authenticity of the underlying assets, the rationality of valuation, and the executability of the redemption mechanism are all core factors that determine the credibility of the project and its market acceptance.
3. Gain Investor Recognition
The core of RWA lies in asset mapping and rights confirmation. Therefore, whether the final buyer or user of off-chain assets recognizes the rights represented by on-chain tokens is the key to the success or failure of the project. This is not only related to the personal willingness of investors but is also closely related to the legal attributes of the tokens and the clarity of rights.
While RWA project parties are promoting compliance processes, they must also confront another core issue: investors must be informed. In reality, many projects package risks with complex structures, failing to clearly disclose the status of underlying assets or the logic of token models. This leads to investors participating without a full understanding. Once fluctuations or risk events occur, it not only triggers a crisis of market trust but may also attract regulatory attention, making matters more difficult to handle.
Therefore, it is crucial to establish a clear mechanism for investor screening and education. RWA projects should not be open to all groups, but should intentionally introduce mature investors with a certain level of risk tolerance and financial understanding. In the early stages of the project, it is especially necessary to set certain thresholds, such as a professional investor certification mechanism, participation limits, and risk disclosure briefings, to ensure that entrants are "informed and voluntary" and truly understand the asset logic, compliance boundaries, and market liquidity risks behind the project.
4. Ensure that the institutional operators in the chain comply with regulations
In the full process of RWA, it often involves multiple links such as fundraising, custody, valuation, tax processing, and cross-border compliance. Each link corresponds to real-world regulatory agencies and compliance requirements. Project parties need to complete compliance declarations and regulatory connections within the relevant legal framework to reduce legal risks. For example, in the part involving fundraising, special attention should be paid to whether it triggers compliance obligations related to securities issuance, anti-money laundering, and other aspects.
5. Preventing Post-Compliance Risks
Compliance is not a one-time action; after the implementation of RWA projects, it is necessary to continuously face changes in the dynamic regulatory environment. Preventing potential administrative investigations or compliance accountability in the aftermath is an important guarantee for the sustainable development of the project. It is recommended that project parties establish a professional compliance team and maintain a communication mechanism with regulatory authorities.
6. Brand Reputation Management
In the highly sensitive virtual asset industry, the RWA project also needs to pay attention to public opinion management and market communication strategies. Building a transparent, trustworthy, and professional project image helps to enhance public and regulatory trust, creating a favorable external environment for long-term development.
4. Conclusion
In the current process of continuous integration between virtual assets and the real economy, various RWA projects have different intentions and mechanisms, featuring both technological innovations and financial experiments. The capabilities, expertise, and practical paths of different projects vary greatly, warranting our careful study and classification.
Through extensive research and participation in projects, we have also deeply realized that for market participants, the greatest challenge often lies not in the technical aspects, but in the uncertainty of the system, especially the unstable factors in administrative and judicial practices. Therefore, what we need more is to explore "practical standards"—even if we do not have legislative and regulatory power, promoting the formation of industry standardization and compliance in practice is still valuable. As long as more participants join, pathways mature, and regulatory agencies establish sufficient management experience, the system will gradually improve. Under the rule of law framework, facilitating cognitive consensus through practice and promoting institutional evolution through consensus is indeed a "bottom-up" positive institutional evolution for society.
But we must also keep compliance as a constant alert. Respecting the existing judicial and regulatory framework is the basic premise of all innovative activities. Regardless of how the industry develops or how technology evolves, the law remains the bottom line logic that safeguards market order and public interest.
Special statement: This represents the personal views of the author of this article and does not constitute legal advice or opinions on specific matters.
The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
Web3 Lawyer Decodes: What kind of RWA does everyone understand?
Source: encryption salad
Recently, there has been a lot of discussion about RWA projects in the Web3 community. Industry observers often put forward the thesis that "RWA will reconstruct Hong Kong's new financial ecology", believing that relying on the existing regulatory framework of the Hong Kong SAR, the track will usher in breakthrough development. In the process of communicating and discussing with the majority of colleagues, we found that everyone has been arguing about the so-called "compliance" issue recently, and their understanding of the question of "what is compliance" is also different. This phenomenon is actually based on the fact that there are still differences in the understanding of the concept of RWA.
Therefore, it is necessary for the encryption salad to discuss from the perspective of a professional legal team how the concept of RWA should be defined and to clarify the compliance red lines of RWA.
1. How should the concept of RWA be defined?
(1) Background and Advantages of RWA Projects
Currently, RWA is becoming the focus of market discussions and is gradually forming a new wave of development. This phenomenon is mainly based on the following two major backgrounds:
One reason is that the advantages of the tokens themselves can compensate for the shortcomings of traditional financing.
Traditional financial markets face inherent shortcomings such as high entry barriers, long financing cycles, slow financing speeds, and complex exit mechanisms. However, token financing can precisely avoid these defects. Compared to traditional IPOs, RWA has the following significant advantages:
1. Fast financing speed: Due to the circulation of tokens based on blockchain technology, which usually circulates in decentralized intermediary trading institutions, it avoids obstacles such as foreign investment access restrictions, industry policy constraints, and lock-up period requirements that traditional financial projects may encounter. At the same time, it can also compress the review process that originally took months or even years, greatly improving the financing rate.
2. Asset Diversification: Traditional IPOs have a single type of asset, only supporting equity issuance, thus imposing strict requirements on the revenue stability, profitability, and capital structure of the issuer. However, for RWA, the types of suitable assets are more diverse, encompassing various non-standard assets, which not only expands the range of financing assets but also shifts the focus of credit assessment to the quality of underlying assets, significantly lowering the qualification threshold for the issuer.
3. Relatively Low Financing Costs: Traditional IPOs require long-term collaboration from multiple intermediary institutions such as investment banks, auditors, and law firms, with the total cost of the listing process potentially reaching millions or even tens of millions. However, RWA issues tokens through decentralized exchanges, eliminating a significant amount of intermediary fees, while also reducing another large portion of labor costs through the use of smart contracts.
In summary, RWA has taken the spotlight in financing projects with its unique advantages, while the Web3 world and the cryptocurrency market particularly need funds and projects from the traditional real world. This has led to the current situation where, whether aiming for substantial business transformation or simply wanting to ride the "wave" and gain attention, leading projects in the segmented fields of listed companies and various quirky startups at the grassroots level are actively exploring the application possibilities of RWA.
Secondly, Hong Kong's "compliance" has added fuel to the heat.
Actually, the development of RWA overseas has been underway for a while. The recent surge in interest is due to a series of regulatory innovations passed in Hong Kong, which have implemented several benchmark projects, providing domestic investors with a compliant channel to participate in "RWA" for the first time. The "compliant" RWA that the Chinese can access has been realized. This groundbreaking progress not only attracts native encryption assets but also encourages traditional sector projects and funds to begin paying attention to the investment value of RWA, ultimately driving market enthusiasm to new heights.
However, do users who want to experience RWA really understand what RWA is? There are various RWA projects with different underlying assets and operational structures; can everyone distinguish their differences? Therefore, we believe it is necessary to clearly define what compliant RWA is through this article.
People generally believe that RWA is a financing project that tokenizes underlying real-world assets through blockchain technology. However, when we examine the underlying assets of each project in detail and trace back the process of project operation, we find that the underlying logic of these projects is actually different. We conducted a systematic study on this issue and summarized the following understanding of the concept of RWA:
We believe that RWA is actually a broad concept and does not have a so-called "standard answer." The process of asset tokenization achieved through blockchain technology can all be referred to as RWA.
(2) Elements and Characteristics of RWA Projects
Real RWA projects need to have the following characteristics:
1. Based on real assets
The authenticity of underlying assets and whether the project party can establish a transparent and acceptable off-chain asset verification mechanism through third-party auditing is a key basis for determining whether the project's token will achieve effective value recognition in reality. For example, PAXG, which issues tokens that are anchored to gold in real-time, with each token backed by 1 ounce of physical gold, and the gold reserves managed by a third-party management platform, undergoing quarterly audits by a third-party auditing company, even allowing token holders to redeem a corresponding amount of physical gold. This highly transparent and regulated asset verification mechanism enables the project to gain the trust of investors and provides a foundation for effective valuation within the real financial system.
2. Asset Tokenization on Chain
Asset tokenization refers to the process of converting real-world assets into digital tokens that can be issued, traded, and managed on the blockchain through smart contracts and blockchain technology. The value flow and asset management process of RWA are automatically executed through smart contracts. Unlike traditional financial systems that rely on intermediaries for transactions and settlements, RWA projects can leverage smart contracts to achieve transparent, efficient, and programmable business logic execution on the blockchain, thereby significantly enhancing asset management efficiency and reducing operational risks.
Asset tokenization endows RWA with key characteristics of being divisible, tradable, and highly liquid. After asset tokenization, assets can be split into small tokens, lowering the investment threshold and changing the ways assets are held and circulated, allowing retail investors to participate in the originally high-threshold investment market.
3. Digital assets have ownership value
The tokens issued by RWA projects should belong to digital assets with property attributes. Project parties should clearly distinguish between data assets and digital assets: data assets are a collection of data owned by enterprises that can create value. In contrast, digital assets are the value itself and do not need to be repriced through data. To illustrate, when you design a painting, upload it to the blockchain, and generate an NFT, this NFT is a digital asset because it can be authenticated and traded. However, the large amount of user feedback, browsing data, click rates, and other data you collect regarding this painting belong to data assets. You can analyze data assets to understand user preferences, improve your work, and adjust its price.
4. The issuance and circulation of RWA tokens comply with legal regulations and are subject to administrative supervision
The issuance and circulation of RWA tokens must be operated within the existing legal framework, otherwise it may not only lead to the failure of the project, but also may lead to legal risks. First of all, real-world assets must be real, legitimate, and have clear ownership without disputes, so that they can serve as the basis for token issuance. Second, RWA tokens usually have income rights or asset interests, which can easily be recognized as securities by regulators in various countries, so they must be handled in compliance with local securities regulations before issuance. The issuer must also be a qualified institution, such as holding an asset management or trust license, and complete KYC and anti-money laundering procedures. After entering circulation, the trading platform of RWA tokens also needs to be regulated, usually requiring a compliant exchange or a secondary market with a financial license, and no random transactions on decentralized platforms are allowed. In addition, information disclosure is required on an ongoing basis to ensure that investors have access to the true picture of the assets linked to the token. Only under such a regulatory framework can RWA tokens be legally and safely issued and circulated.
In addition, RWA's compliance management has typical cross-jurisdictional characteristics, so it is necessary to build a systematic compliance framework covering the legal norms, capital flow paths, and various regulatory authorities where the assets are located. In the whole life cycle of asset on-chain, cross-chain, and cross-border and cross-platform circulation of tokens, RWA must establish a compliance mechanism covering multiple links such as asset confirmation, token issuance, capital flow, income distribution, user identification, and compliance audit. This involves not only legal advice and compliance design, but may also require the introduction of third-party trust, custody, auditing, and regulatory technology solutions.
(3) Types and Regulation of RWA Projects
We found that there are two parallel types in the eligible RWA projects:
1. Narrow definition of RWA: Physical assets on-chain
We believe that the narrow definition of RWA specifically refers to projects that tokenize real assets with authenticity and verifiability on the blockchain, which is also the common understanding of RWA among the public. Its application market is the most extensive, such as projects that anchor tokens to offline real assets like real estate and gold.
2. STO (Security Token Offering): Financial Assets on the Blockchain
Apart from the narrowly defined RWA projects, we have found that a large number of RWA projects currently existing in the market are STOs.
(1) Definition of STO
According to the differences in underlying assets, operational logic, and token functionality, existing tokens in the market can generally be divided into two main categories: Utility Tokens and Security Tokens. STO refers to the financialization of real assets, issuing tokenized shares or certificates in the form of Security Tokens on the blockchain.
(2) Definition of Securities-type Tokens
Security tokens, in contrast to utility tokens, are, simply put, on-chain financial products driven by blockchain technology that are subject to securities regulations, similar to electronic stocks.
(3) Regulatory Framework for Security Tokens
Under the regulatory framework of mainstream encryption-friendly countries such as the United States and Singapore, once a token is identified as a security-type token, it will be subject to the constraints of traditional financial regulatory bodies (such as the Securities and Exchange Commission), and the design and trading model of the token must comply with local securities regulations.
From the perspective of economics, the core goal of financial products is to coordinate the supply and demand relationship between financiers and investors. From the perspective of legal regulation, some countries are more focused on protecting the interests of investors, while others are more inclined to encourage smooth and innovative financing behavior. This difference in regulatory stance is reflected in the specific rules, compliance requirements and enforcement levels of each country's legal system. Therefore, when designing and issuing RWA products, it is necessary not only to consider the authenticity and legitimacy of the underlying assets, but also to conduct a comprehensive review and compliance design of key links such as product structure, issuance method, circulation path, trading platform, investor access threshold and capital cost.
It is especially worth noting that once the core appeal of a certain RWA project comes from its high leverage and high return expectations, and positions "hundred-fold, thousand-fold returns" as its main selling point, then regardless of its superficial packaging, its essence is highly likely to be classified as a securities product by regulatory agencies. Once identified as a security, the project will face a much harsher and more complex regulatory framework, and its subsequent development path, operational costs, and even legal risks will be greatly increased.
Therefore, when discussing the legal compliance of RWA, we need to deeply understand the connotation of "securities regulations" and the regulatory logic behind it. Different countries and regions have different definitions and regulatory focuses regarding securities. The United States, Singapore, and the Hong Kong area have all defined the criteria for the identification of security tokens. It is not difficult to find that the identification method is essentially to determine whether the tokens comply with the local securities regulations' criteria for identifying "securities". Once the securities conditions are met, they are classified as security tokens. Therefore, we have organized the relevant provisions of key countries (regions) as follows:
A. Mainland China
Under the regulatory framework in mainland China, the Securities Law of the People's Republic of China defines securities as stocks, corporate bonds, depository receipts and other negotiable instruments recognized by the State Council that can be issued and traded. Additionally, the listing and trading of government bonds and shares of securities investment funds are also included in the regulations of the Securities Law.
(The above image is taken from the "Securities Law of the People's Republic of China")
B. Singapore
Although Singapore's "Digital Token Offering Guidelines" and "Securities and Futures Act" do not directly mention the concept of "security tokens," they detail different circumstances under which tokens may be recognized as "capital market products:"
(The above image is taken from "Digital Token Issuance Guide" )
C. Hong Kong, China
The Securities and Futures Commission of Hong Kong has specific enumerated provisions regarding the positive and negative lists of securities in the Securities and Futures Ordinance.
! AQc90CA1zzVHHEyQmGnejIPAkRct2BntKf63DwrJ.png! xizyNp5UfLo07RzZQ4W5IeCP2oeKE435yFUGSf0o.png
(The above image is taken from the Securities and Futures Ordinance )
The regulation defines "securities" to include structured products such as "shares, equity shares, notes, and bonds," and does not limit their existence to traditional carriers. The SFC has explicitly pointed out in the "Circular on Intermediaries Engaging in Tokenized Securities-related Activities" that the nature of its regulatory targets is essentially traditional securities packaged as tokens.
D. United States
The U.S. Securities and Exchange Commission (SEC) stipulates that any product that passes the Howey Test is classified as a security. Any product deemed a security must be regulated by the SEC. The Howey Test is a legal standard established by the U.S. Supreme Court in the 1946 case SEC v. W.J. Howey Co., used to determine whether a transaction or scheme constitutes an "investment contract," thereby subjecting it to U.S. securities law regulation.
The Howey Test lists four conditions under which financial products are deemed to be "securities." The application of the Howey Test in digital assets is outlined in the SEC's Framework for "Investment Contract" Analysis of Digital Assets. We will conduct a detailed analysis on this next:
It refers to the investor investing money or assets in exchange for some rights or expected returns to the project party. In the field of digital assets, whether a token is purchased with fiat currency or cryptocurrency, as long as there is a value exchange, this criterion can usually be found to be met. As a result, most token offerings largely meet this criterion.
"Joint venture" refers to a close binding of interests between investors and issuers, typically manifested as the investors' returns being directly related to the project's operational effectiveness. In token projects, if the returns of token holders depend on the business development or operational results of the project party, it meets the characteristics of a "joint venture". This condition is also relatively easy to establish in reality.
This point is key to determining whether a token will be classified as a securities-type token. This condition means that if an investor purchases a product with the expectation of future appreciation or obtaining other economic returns, and such returns do not come from their own use or operational activities, but rather depend on the overall development of a project created by others' efforts, then such a product may be regarded as a "security."
Specifically, in RWA projects, if investors buy tokens for the purpose of obtaining future appreciation or economic returns, rather than the benefits from their own use or business activities, then the token may have a "profit expectation", which triggers the determination of the security attributes. Especially when the token's earnings are highly dependent on the professional operation of the issuer or project team, such as liquidity design, ecosystem expansion, community building, or cooperation with other platforms, this "reliance on the efforts of others" feature further strengthens its securitization possibilities.
RWA tokens that have sustainable value in the true sense should be directly anchored to the real returns generated by the underlying real assets, rather than relying on market speculation, narrative packaging, or platform premiums to drive their value growth. If the value fluctuations of the token primarily stem from the "recreation" by the team or platform behind it, rather than the income changes of the asset itself, then it does not possess the characteristics of "narrow RWA" and is more likely to be regarded as a security token.
The U.S. SEC has introduced the Howey Test in its regulation of encryption tokens, which means it no longer relies on the form of the tokens to determine its regulatory stance, but instead shifts to a substantive review: focusing on the actual functions of the tokens, their issuance methods, and investor expectations. This change marks a shift towards a stricter and more mature legal positioning of U.S. regulatory agencies regarding crypto assets.
2. What is the legal logic of the "compliance" tiering in RWA projects?
After discussing so much about the concepts and definitions of RWA, let's return to the core question raised at the beginning of the article, which is also a common focus of attention in the industry:
As RWA has developed to this day, which types of RWA can be considered truly "compliant" RWA? How can we meet the compliance of RWA projects in practice?
First, we believe that compliance means being regulated by local regulatory authorities and adhering to the provisions of the regulatory framework. In our understanding, the compliance of RWA is a layered system.
Layer One: Sandbox Compliance
This specifically refers to the Ensemble sandbox project designed by the Hong Kong Monetary Authority (HKMA), which is currently the narrowest and most regulatory pilot definition of "compliance." The Ensemble sandbox encourages financial institutions to explore technological and model innovations for tokenization applications through projects like RWA, in a controlled environment, to support the digital Hong Kong dollar project they lead.
The Hong Kong Monetary Authority (HKMA) has demonstrated a high level of emphasis on the sovereignty of future monetary systems in its promotion of the central bank digital Hong Kong dollar (e-HKD) and exploration of regulations for stablecoins. The competition between central bank digital currencies and stablecoins is essentially a redefinition and contestation of "monetary sovereignty." The sandbox provides project parties with a certain degree of policy space and flexibility, which is conducive to promoting exploratory practices for bringing real assets onto the blockchain.
At the same time, the Monetary Authority is actively guiding the development of tokenized assets, trying to expand their application in real scenarios such as payments, settlements, and financing within a compliant framework. Several technology and financial institutions, including Ant Group, are members of the sandbox community, participating in the construction of the digital asset ecosystem. Projects entering the regulatory sandbox imply a higher degree of compliance and policy recognition to a certain extent.
However, from the current situation, such projects are still in a closed operating state and have not yet entered the broader secondary market circulation stage, indicating that there are still practical challenges in terms of asset liquidity and market connectivity. Without a stable funding supply mechanism and efficient secondary market support, the entire RWA token system is difficult to form a true economic closed loop.
Second Layer: Hong Kong Administrative Regulatory Compliance
As an international financial center, Hong Kong Special Administrative Region has been continuously promoting institutional exploration in the field of virtual assets in recent years. As the first region in China to explicitly promote the development of virtual assets, particularly tokenized securities, Hong Kong has become a target market that many mainland project parties are eager to try, thanks to its open, compliant, and clearly defined regulatory environment.
By reviewing the relevant circulars and policy practices issued by the Hong Kong Securities and Futures Commission, it is not difficult to find that the core of Hong Kong's regulation of RWA is actually to incorporate it into the framework of STO for compliance management. Furthermore, the Commission has established a relatively complete licensing system for Virtual Asset Service Providers (VASP) and Virtual Asset Trading Platforms (VATP), and is preparing to publish the second virtual asset policy declaration to further clarify its regulatory stance and basic principles regarding the integration of virtual assets with real assets. Under this institutional framework, tokenization projects involving real assets, especially RWA, have been included in a higher level of compliance regulatory category.
From the current RWA projects that have been implemented in Hong Kong and have a certain market influence, most projects possess clear securities characteristics. This means that the tokens issued involve ownership, rights to income, or other transferable rights related to real assets, which can constitute "securities" as defined under the Securities and Futures Ordinance. Therefore, these types of projects must be issued and circulated through the method of Security Token Offering (STO) in order to obtain regulatory approval and achieve compliant market participation.
In summary, Hong Kong's regulatory positioning on RWA has become relatively clear: any mapping of real assets with securities attributes on the blockchain should be included in the STO regulatory framework. Therefore, we believe that the current development path of RWA promoted by Hong Kong is essentially a specific application and practice of the securities tokenization (STO) path.
Layer Three: A Clear Regulatory Framework for Encryption-Friendly Areas
In regions with an open attitude towards virtual assets and relatively mature regulatory mechanisms, such as the United States, Singapore, and some European countries, a more systematic compliance path has been established for the issuance, trading, and custody of encryption assets and their mapped real-world assets. RWA projects in such regions, if they can legally obtain the corresponding licenses and comply with information disclosure and asset compliance requirements, can be regarded as compliant RWAs operating under a clear regulatory framework.
Fourth Layer: "Pan-compliance"
This is the compliance in the broadest sense, which is opposite to "non-compliance". It specifically refers to RWA projects within certain offshore jurisdictions where the government temporarily adopts a "laissez-faire" attitude towards the virtual asset market, which has not been explicitly identified as non-compliant or illegal. Its business model has a certain degree of compliance space within the local legal framework. Although the scope and concept of this compliance are relatively vague and do not yet constitute complete legal confirmation, it falls under the business state of "what is not prohibited by law is allowed" before legal regulation becomes clear.
In reality, we can observe that the vast majority of RWA projects find it difficult to achieve the first two types of compliance. Most projects choose to attempt the first three paths—namely, relying on the lenient policies of certain encryption "friendly" jurisdictions to try to bypass sovereign regulatory boundaries and achieve formal "compliance" at a lower cost.
As a result, RWA projects have been implemented "like dumplings" on the surface, but the time point has not yet come to generate substantial financial value. The fundamental turning point will depend on whether Hong Kong can explore the secondary market mechanism of RWA – in particular, how to liberalise the cross-border flow of capital. If RWA trading remains confined to a closed market for local retail investors in Hong Kong, liquidity and funding will be extremely limited. To achieve a breakthrough, global investors must be allowed to invest in China-related assets through compliance mechanisms, indirectly "buying China" in the form of RWA.
Hong Kong's role here can be compared to the significance of Nasdaq for global technology stocks in the past. Once the regulatory mechanisms mature and the market structure is clear, when Chinese people want to "go abroad" for financing and foreigners want to "buy the dip" on Chinese assets, the first stop will definitely be Hong Kong. This will not only be a regional policy dividend but also a new starting point for the reconstruction of financial infrastructure and capital market logic.
In summary, we believe that the compliance of RWA projects should be done within the current scale, and all projects must maintain policy sensitivity, and once there is a legal adjustment, it must be urgently adjusted. While this means investing more resources and incurring higher time and compliance costs in the early stages of a project, it will significantly reduce systemic risks in the long run, including legal, operational, and even investor relations.
Among all the potential risks, the fundraising risk is undoubtedly the most lethal hidden danger for RWA. Once the project design is determined to be illegal fundraising, regardless of whether the assets are real or not, whether the technology is advanced or not, it will face major legal consequences, posing a direct threat to the survival of the project itself, and dealing a heavy blow to the assets and reputation of the enterprise. In the process of RWA development, there will inevitably be differences in the definition of compliance in different regions and different regulatory environments, and developers and institutions must formulate a phased compliance strategy in detail based on their own business type, asset attributes, and regulatory policies of the target market. On the premise of ensuring that the risks are controllable, the implementation of the RWA project can be steadily promoted.
3. Legal Advice on RWA Projects**
As a summary, we, as a legal team, systematically outline the core aspects that need attention from a compliance perspective during the comprehensive advancement of the RWA project.
1. Choose a policy-friendly jurisdiction
Under the current global regulatory landscape, the compliance advancement of RWA projects should prioritize jurisdictions with clear policies, mature regulatory systems, and an open attitude towards virtual assets, which can effectively reduce compliance uncertainty.
2. The underlying assets must have real redeemable capabilities
No matter how complex the technical architecture is, the essence of RWA projects is still to map the rights of real assets onto the chain. Therefore, the authenticity of the underlying assets, the rationality of valuation, and the executability of the redemption mechanism are all core factors that determine the credibility of the project and its market acceptance.
3. Gain Investor Recognition
The core of RWA lies in asset mapping and rights confirmation. Therefore, whether the final buyer or user of off-chain assets recognizes the rights represented by on-chain tokens is the key to the success or failure of the project. This is not only related to the personal willingness of investors but is also closely related to the legal attributes of the tokens and the clarity of rights.
While RWA project parties are promoting compliance processes, they must also confront another core issue: investors must be informed. In reality, many projects package risks with complex structures, failing to clearly disclose the status of underlying assets or the logic of token models. This leads to investors participating without a full understanding. Once fluctuations or risk events occur, it not only triggers a crisis of market trust but may also attract regulatory attention, making matters more difficult to handle.
Therefore, it is crucial to establish a clear mechanism for investor screening and education. RWA projects should not be open to all groups, but should intentionally introduce mature investors with a certain level of risk tolerance and financial understanding. In the early stages of the project, it is especially necessary to set certain thresholds, such as a professional investor certification mechanism, participation limits, and risk disclosure briefings, to ensure that entrants are "informed and voluntary" and truly understand the asset logic, compliance boundaries, and market liquidity risks behind the project.
4. Ensure that the institutional operators in the chain comply with regulations
In the full process of RWA, it often involves multiple links such as fundraising, custody, valuation, tax processing, and cross-border compliance. Each link corresponds to real-world regulatory agencies and compliance requirements. Project parties need to complete compliance declarations and regulatory connections within the relevant legal framework to reduce legal risks. For example, in the part involving fundraising, special attention should be paid to whether it triggers compliance obligations related to securities issuance, anti-money laundering, and other aspects.
5. Preventing Post-Compliance Risks
Compliance is not a one-time action; after the implementation of RWA projects, it is necessary to continuously face changes in the dynamic regulatory environment. Preventing potential administrative investigations or compliance accountability in the aftermath is an important guarantee for the sustainable development of the project. It is recommended that project parties establish a professional compliance team and maintain a communication mechanism with regulatory authorities.
6. Brand Reputation Management
In the highly sensitive virtual asset industry, the RWA project also needs to pay attention to public opinion management and market communication strategies. Building a transparent, trustworthy, and professional project image helps to enhance public and regulatory trust, creating a favorable external environment for long-term development.
4. Conclusion
In the current process of continuous integration between virtual assets and the real economy, various RWA projects have different intentions and mechanisms, featuring both technological innovations and financial experiments. The capabilities, expertise, and practical paths of different projects vary greatly, warranting our careful study and classification.
Through extensive research and participation in projects, we have also deeply realized that for market participants, the greatest challenge often lies not in the technical aspects, but in the uncertainty of the system, especially the unstable factors in administrative and judicial practices. Therefore, what we need more is to explore "practical standards"—even if we do not have legislative and regulatory power, promoting the formation of industry standardization and compliance in practice is still valuable. As long as more participants join, pathways mature, and regulatory agencies establish sufficient management experience, the system will gradually improve. Under the rule of law framework, facilitating cognitive consensus through practice and promoting institutional evolution through consensus is indeed a "bottom-up" positive institutional evolution for society.
But we must also keep compliance as a constant alert. Respecting the existing judicial and regulatory framework is the basic premise of all innovative activities. Regardless of how the industry develops or how technology evolves, the law remains the bottom line logic that safeguards market order and public interest.
Special statement: This represents the personal views of the author of this article and does not constitute legal advice or opinions on specific matters.