Mainland Assets Issuing RWA in Hong Kong: Compliance Requirements and Asset Selection Guide

Recently, many project parties have inquired about the tokenization of physical assets RWA(, with a diverse range of underlying asset types including agricultural products, real estate, precious metals, etc. In fact, under the current regulatory environment, apart from RWA projects that have passed the Hong Kong sandbox review and are regulated, other types of RWA projects carry a higher risk, especially those issued to mainland residents.

This article will elaborate on which mainland assets can be used in the Hong Kong sandbox and which cannot, in order to help project parties conduct their business more efficiently.

Restrictions and Criteria for Assessing Mainland Assets for RWA

First of all, assets located on the mainland and primarily operated for mainland residents can do RWA, and there are successful cases to prove this. However, there are indeed restrictions on the issuance of RWA for mainland assets in the Hong Kong sandbox; the following three types of assets cannot do RWA:

1. Assets that do not comply with Hong Kong laws and regulations
2. Assets that do not comply with mainland laws and regulations
3. Assets that are currently not suitable for issuance in Hong Kong

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

Due to the assets being in the mainland, but the tokenized assets being issued and operated in Hong Kong, the entire financing chain spans two locations, thus it must comply with the "dual compliance principle": the underlying assets must be compliant in both the mainland and Hong Kong.

Hong Kong Compliance

Hong Kong mainly undertakes asset tokenization and financial operation, and it is necessary to pay special attention to the requirements of financial regulatory laws on underlying assets, such as the Securities and Futures Ordinance, the Banking Ordinance, and the Insurance Ordinance.

Although Hong Kong has not yet issued clear regulations for the issuance and supervision of RWAs and is still in the exploratory stage, understanding Hong Kong's consistent regulatory principles for financial assets and referring to the issuance rules of similar financial products can improve the success rate.

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

Mainland Compliance

It is necessary to pay attention to the legality of the underlying assets themselves and the legality of their operational methods.

In terms of the legality of underlying assets, physical items can be categorized into circulating items, restricted circulation items, and prohibited items. Items used for RWA should be "circulating items" or "restricted circulation items" with permission.

In terms of the legality of operational methods, the underlying assets must comply with mainland laws: stay away from the red line and obtain the necessary administrative permits.

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) is currently not suitable for issuance in Hong Kong.

Although it meets the "dual compliance principle", the assets that are currently not suitable for issuance in Hong Kong include:

• Assets that do not possess "high-tech" or "clean and green" attributes
• Assets that are difficult to generate good cash flow

For example, some real estate with low economic value, even if endowed with new concepts, finds it difficult to change the fact that its market value continues to decline, and the possibility of issuing such assets as RWA is very low.

Specific Mainland Assets Not Suitable for RWA

Jewelry and Cultural Artifacts

The consultation volume for jewelry and cultural relics RWA projects is large, but it is difficult to provide clear legal opinions. The reason lies in the variety of products and the complexity of the regulations, with various special restrictions scattered across different laws and regulations. Overall, it is currently not recommended to use jewelry and cultural relics as underlying assets for RWA.

The following situations can be directly vetoed:

1. Gemstone products with gambling nature
2. Processed jewelry and gemstones
3. National prohibition on the sale of biological products
4. Low-quality or processed jadeite or imitations
5. Precious metals restricted or prohibited from circulation by the country

Intellectual Property

Currently, there are no successful cases in the Hong Kong RWA project, but intellectual property should not be excluded from the scope of exploration. If the intellectual achievements have significant commercial value, applications can be attempted once regulatory norms are clarified.

Agriculture and Agricultural Products

If the project meets the standards of scientific ethics review, has a high technological content and research value, and has a good commercial prospect, it can also try to apply after the regulatory norms are clarified.

Pure Concept Type

RWA is not equivalent to crowdfunding. A veto opinion is usually given directly for such projects.

Conclusion

For underlying assets that are neither in the mainland nor in Hong Kong, can they be treated as RWA in Hong Kong? Currently, there are no explicit restrictions on the geographical location of assets. From the perspective of Hong Kong's positioning as an "international financial center," the location of the assets should not be an obstacle; the key lies in whether the assets themselves are real, credible, compliant, and possess investment value.

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