What are the restrictions for mainland assets issuing RWA in Hong Kong?

Question

Recently, the Sa Jie team has been continuously receiving a large number of RWA project inquiries, with underlying assets that are diverse and varied, including agricultural products, real estate, precious metals, and even some projects that sound quite psychedelic and purely conceptual...

In fact, the Sa Sister team has already made it clear in previous articles that under the premise that the announcements on September 4 and the notice on September 24 in our country remain valid, other types of RWA are very dangerous (especially RWA projects issued to residents of mainland China), except for RWA projects that have passed the strict review of the Hong Kong Ensemble sandbox and have a certain "ability to resist criminal risks" under supervision.

Therefore, today the Sa Sister team will directly clarify which mainland assets can be used in the Hong Kong sandbox and which assets cannot be used, so that partners can conduct business more efficiently and save on consultation fees.

01 Basic Understanding: Restrictions and Criteria for Judging Mainland Assets for RWA

First, it is clear that the "physical entity" located in mainland China and primarily operating for mainland residents can be used for RWA. Several successful RWA projects in the past have already validated this point.

However, there are indeed restrictions on assets located on the mainland of our country wanting to issue RWA in Shahe, Hong Kong. Based on the practical experience of Sister Sa's team, the following three types of assets cannot be made into RWA:

Assets that do not comply with the laws and regulations of the Hong Kong Special Administrative Region of China;
Assets that do not comply with the legal regulations of mainland China.
Assets that are not suitable for issuance in Hong Kong at the current stage.

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

In fact, this logic is easy to understand. The assets are in mainland China, but the tokenised traditional assets are actually issued and operated in Hong Kong. The entire financing chain spans both mainland China and Hong Kong, so it naturally needs to comply with the "dual compliance principle"—the underlying assets must be compliant in both mainland China and Hong Kong.

1. Hong Kong Regulatory Aspects

Given that Hong Kong is primarily responsible for asset tokenization and financial operation in RWA projects, we must pay special attention to the legal regulations related to financial supervision in Hong Kong regarding the requirements for underlying assets when issuing financial products, such as the Securities and Futures Ordinance, the Banking Ordinance, the Insurance Ordinance, and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

The Sa Jie team has previously stated that currently, Hong Kong in our country has not issued clear normative legal documents regarding RWA issuance and regulation, and is still in the exploratory stage. Therefore, the current RWA projects are still subject to a "one project, one discussion" situation during the sandbox regulatory review process. However, the absence of clear normative legal documents does not mean that everyone has to cross the river by feeling the stones. By grasping the consistent regulatory principles for financial assets in Hong Kong and referring to the specific issuance rules of similar financial products, the success rate can be greatly improved.

In principle, the Hong Kong region of our country has consistently adopted the "substantive regulatory principle" (also known as "look-through regulation") for financial assets. This means that compliance is determined by the substance of the asset rather than its shell; it is not feasible to disguise an illegal core with a compliant appearance. Specifically, the judgment needs to be based on the regulatory rules applicable to the physical assets corresponding to RWA. For example, if the underlying asset is a bond, then the review norms applicable to the underlying asset are the "Securities and Futures Ordinance" of the Hong Kong region and related regulatory documents.

2. Mainland Regulations

Since the underlying asset "physical body" of the tokenization is in the mainland, it is necessary to pay special attention to the legality of the underlying asset itself and the legality of its operational methods, which needs to be viewed from two aspects.

Regarding the legitimacy of the underlying assets themselves, according to my country's "Civil Code" and relevant judicial interpretations and practical experiences, assets can be categorized into three types based on whether they can be circulated and the scope of their circulation:

Circulating Goods
Restricted Circulation Items
Prohibited Circulation Items

Circulating goods refer to items that are legally allowed to circulate freely among civil subjects; restricted circulating goods refer to items for which the law imposes certain limitations on the scope and degree of circulation; prohibited goods refer to items that are expressly prohibited by law from circulation and transfer. In the opinion of the Sa Jie team, items used for RWA should be "circulating goods" or "restricted circulating goods" that are permitted for circulation.

In practice, "restricted circulation items" generally include:

"Prohibited Circulating Items" generally include:

In terms of the legality of the operational model, due to the cash flow requirements for RWA projects' underlying assets in the Hong Kong region of our country (currently issued projects all have commercial applications), the underlying assets also need to comply with the legal regulations of our country at the operational level: avoiding red lines and obtaining the necessary administrative licenses for operation.

It is not advisable to issue assets in Hong Kong at this stage.

Such assets already meet the requirements of the "dual compliance principle," but it is not appropriate to issue them in Hong Kong at this stage.

On one hand, the RWA in Hong Kong, China is still in the sandbox testing phase. Therefore, the selection of underlying assets is relatively cautious, and the clearly recommended types of underlying assets are those with attributes of "high-tech" and "clean and green". Thus, the Sa Jie team believes that, at this stage, to issue RWA projects in Hong Kong, the underlying assets must at least meet one of the above two conditions, such as carbon emission rights, which, although not tangible, are closely linked to property rights in the green economy.

On the other hand, some assets that want to be revitalized through RWA, which cannot generate better cash flow, are also not suitable for RWA in the Hong Kong sandbox, given the low probability. For example, some real estate with low economic value, no matter how much it is "empowered" through emerging concepts, cannot change the reality that the market value of the asset itself is gradually decreasing. The possibility of issuing RWA for such assets is very low.

02 These specific mainland assets basically cannot be RWA...

After the partners have understood the principles and standards for determining whether the underlying assets can issue RWA, we will conduct a centralized Q&A session on the assets that have been frequently consulted recently or those that need to be discussed separately, in order to save everyone consultation fees.

Jewelry and Artifacts RWA

Jewelry and cultural relics RWA is a category with a high volume of inquiries, and it is also the most difficult to provide clear legal opinions on such RWA projects. This is mainly because there are many varieties of jewelry and cultural relics, the market is deep, and various special restrictions are scattered across laws, judicial interpretations, administrative regulations, departmental rules, and national standards. If the category is not common, it generally requires a large amount of legal verification work to provide opinions. Overall, at this stage, it is not recommended to use jewelry and cultural relics as the underlying assets for RWA.

If partners' assets are in the following situations, they can be vetoed by a single vote:

Gemstone products with gambling characteristics. In simple terms, these are items where the quality cannot be assessed from the exterior and must be cut to determine the internal quality of the raw material or stone, such as jade raw stones, unpeeled green pine raw stones, uncut pearls, etc.
Processed jewelry and gemstones, such as B-grade jadeite, C-grade jadeite, etc.;
The country prohibits the sale of biological products (organic gemstones), such as ivory, helmeted hornbill products, conch, queen conch, coral, rhinoceros horn, tortoiseshell, copal resin, seaweed, amber pillows, amber powder, cinnabar, etc.;
Low-quality or processed jadeite or jade imitations, such as sodalite jade, Guatemalan jade, heat-treated jade, etc.
Countries such as those with pure gold, pure silver, and other precious metals have specific laws that limit or prohibit the circulation of these metals.

Intellectual Property RWA

Intellectual property, such as copyright, trademarks, and patents, has actually seen a considerable number of projects in the overseas crypto asset space. There are even quite a few film and television projects that have achieved quick financing through tokenization methods. Currently, we have not seen any successful cases in RWA projects in Hong Kong, but the Sa Jie team believes that intellectual property is not an unexploitable RWA underlying asset. Each project should be analyzed specifically. If the intellectual achievement has significant commercial value, after regulatory norms are clarified, bold attempts to "break through" can be made.

Agriculture and Agricultural Products RWA

"Can Sunlight Green Grapes be used for RWA?" Not long ago, a friend brought promotional materials for a similar grape project RWA from a domestic company to consult with the Sa Jie team. We do not evaluate specific projects, but if we look at agricultural and agricultural product RWA projects abstractly, if the project meets the standards of scientific and technological ethics review, has a high technological content and research value, and possesses good commercial value, it can also boldly attempt to "break through" after regulatory norms are clarified.

Pure Conceptual RWA

Partners must understand one thing: RWA is not crowdfunding. For such projects, the Sajia team generally gives a rejection opinion directly.

03 Written at the end

To extend a bit: for the "physical assets" that are neither on the mainland nor in Hong Kong, can they apply for RWA in Hong Kong? The team led by Sister Sa believes that currently there are no regulations stating that assets must be located in certain places to apply for Hong Kong RWA. From the perspective of Hong Kong's positioning as an "international financial center", the location of the underlying assets should not be an obstacle to RWA; authenticity, credibility, compliance, and investment value are the hard indicators.

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