Hong Kong RWA Project Underlying Asset Selection Guide

Recently, we have received a large number of inquiries regarding RWA projects, involving a wide variety of underlying assets, from agricultural products to real estate, from precious metals to some purely conceptual projects. Considering the current regulatory environment, apart from RWA projects that are strictly reviewed and issued under regulation through the Hong Kong sandbox, other types of RWA projects carry higher risks, especially those aimed at residents of mainland China.

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

Restrictions and Criteria for Assessing Mainland Assets as RWA

Firstly, it is necessary to clarify that assets located in mainland China and primarily operated for mainland residents can be used for RWA, which has been confirmed by previous successful cases. However, there are indeed some restrictions on issuing RWA for mainland assets 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 the mainland region.
3. Assets that are currently not suitable for issuance in Hong Kong

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

Since the assets are located in the mainland, but the tokenized assets are offered and operated in Hong Kong, the entire financing chain spans both locations. Therefore, it is necessary to comply with the "dual compliance principle"—the underlying assets must be compliant in the mainland as well as in Hong Kong.

Hong Kong regulatory aspects

Hong Kong mainly undertakes the tasks of asset tokenization and financial operations, so it is necessary to pay special attention to the requirements of financial regulatory laws and regulations on the underlying assets, such as the provisions in relevant ordinances.

Although Hong Kong has not yet issued clear normative legal documents regarding the issuance and regulation of RWAs, understanding Hong Kong's consistent regulatory principles for financial assets, and referring to the specific issuance rules for similar financial products, can significantly increase the success rate of projects.

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

Mainland regulations

The regulations in the mainland primarily focus on the legality of the underlying assets themselves and the legality of the operational methods.

The legality of the underlying assets can be divided into three categories: circulating items, restricted items, and prohibited items. The assets used for RWA should be "circulating items" or "restricted items" that are permitted to circulate.

In terms of the legality of operational methods, since Hong Kong has cash flow requirements for RWA projects' underlying assets, the operation of the underlying assets must also comply with the legal regulations of the mainland, avoid red lines, and obtain the necessary administrative permits.

It is currently not suitable to issue assets in Hong Kong.

Some assets, although they meet the "dual compliance principle", may not be suitable for issuance in Hong Kong at this stage. The current RWA in Hong Kong is in a sandbox experimental phase, and the selection of underlying assets is relatively cautious, recommending assets with "high-tech" or "clean green" attributes. In addition, some assets that are difficult to generate good cash flow are also not very suitable for RWA in the Hong Kong sandbox.

Specific mainland assets that are not suitable for RWA

Jewelry and Cultural Artifacts

Consultation volume for jewelry and cultural items RWA projects is relatively large, but it is also the most difficult to provide clear legal opinions on. Overall, it is currently not recommended to use jewelry and cultural items as underlying assets for RWA. The following situations can be directly negated:

1. Gemstone products with gambling characteristics
2. Processed jewelry and gemstones
3. The country bans the sale of biological products
4. Low-quality or processed jade or jade imitations
5. The state has specific laws restricting the circulation and prohibiting the circulation of precious metals.

Intellectual Property

Although there have not yet been successful cases in the RWA projects in Hong Kong, intellectual property is not an unexploitable underlying asset of RWA. If a certain intellectual achievement indeed has significant commercial value, an application can be attempted after regulatory norms are clarified.

Agriculture and Agricultural Products

For agricultural and agricultural product RWA projects, if they possess a high level of technological content and research value under the conditions that meet the standards of scientific and technological ethical review, and have good commercial value, they can also attempt to apply after the regulatory norms are clarified.

Pure Conceptual RWA

It is important to clarify that RWA is not equivalent to crowdfunding. For purely conceptual projects, a veto opinion is usually given.

Conclusion

For underlying assets that are not located in mainland China or Hong Kong, can they be used for RWA in Hong Kong? Currently, there is no explicit regulation stating that assets must be in a specific location to apply for Hong Kong RWA. From the perspective of Hong Kong's positioning as an "international financial center," the geographical location of the underlying assets should not be a barrier; the key lies in whether the assets themselves are genuine, credible, compliant, and have investment value.