Restrictions and Considerations for the Tokenization of Physical Assets Issued by Mainland Assets in Hong Kong

Recently, there has been a surge in consultation demands regarding the tokenization of physical assets ( RWA ) projects, covering multiple fields such as agricultural products, real estate, and precious metals, and even including some purely conceptual projects. However, under the current regulatory environment, apart from RWA projects that have been strictly reviewed and approved for issuance through the Hong Kong regulatory sandbox, other types of RWA projects carry a high level of risk, 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 assets are not suitable, to help relevant parties conduct business more efficiently.

Basic Understanding and Judgment Criteria for Mainland Assets as RWA

Although assets located in mainland China and primarily operated for mainland residents can be made into RWA, there are indeed some restrictions on 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. It is not advisable to issue assets in Hong Kong at this stage.

Dual Compliance Principle

Mainland assets issued as RWA in Hong Kong need to comply with the "dual compliance principle", meaning that the underlying assets must be compliant in both Mainland and Hong Kong.

Hong Kong regulatory aspects

As a region primarily responsible for the asset tokenization and financial operations of RWA projects, Hong Kong needs to pay close attention to the legal regulations related to financial supervision and the requirements for underlying assets. Although Hong Kong has not yet introduced explicit 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 enhance the project's success rate.

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

Mainland regulations

For the RWA projects of underlying assets in the mainland, it is essential to focus on the legality of the assets themselves and the legality of the operating methods.

The legitimacy of the asset itself can be judged from the perspective of the circulation of goods, divided into circulating goods, restricted circulation goods, and prohibited circulation goods. Objects suitable for RWA should be "circulating goods" or "restricted circulation goods" with permission.

In terms of operational methods, the underlying assets need to comply with Chinese legal regulations, stay away from the red line, and obtain the necessary administrative permits.

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

Even if it meets the "dual compliance principle", certain assets are still not suitable for issuance in Hong Kong at this stage. Currently, RWA projects in Hong Kong are still in the sandbox experimental phase and tend to favor assets with "high-tech" or "clean and green" attributes. In addition, assets that are unlikely to generate good cash flow are also less likely to pass the Hong Kong sandbox review.

Specific mainland asset types not suitable for RWA

Jewelry and cultural collectibles

The consulting volume for jewelry and cultural relics RWA projects is relatively large, but it is also the most difficult to provide clear legal opinions on. Overall, at this stage, it is not recommended to use jewelry and cultural relics as the underlying assets for RWA. The following situations can be directly rejected:

1. Gambling-type gemstone products
2. Processed jewelry and gemstones
3. The country prohibits the sale of biological products
4. Low-quality or processed jade or jade imitations
5. Countries like those with pure gold, pure silver, etc. have specific laws restricting or prohibiting the circulation of precious metals.

Intellectual Property

Although there are currently no successful cases in RWA projects in Hong Kong, intellectual property is not an unexploitable underlying asset of RWA. If the intellectual achievements indeed have considerable 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 have high technological content, scientific research value, and good commercial value based on compliance with technology ethics review standards, they can also attempt to apply for approval after regulatory norms are clarified.

Pure Concept Type

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

Conclusion

For the situation where the underlying assets are neither in the mainland nor in Hong Kong, there are currently no restrictive regulations. From the perspective of Hong Kong's positioning as an "international financial center", the location of the assets should not be a hindrance to RWA; the key lies in whether the assets themselves are real, credible, compliant, and have investment value.