Original author: Ye Kai
Original source: Ye Kaiwen
【Prerequisites】
To discuss the topic of Hong Kong RWA, we will first establish two premise consensus: first, Hong Kong RWA refers to a compliant virtual asset product that is moderately regulated and licensed on a licensed exchange, so the views of digital native blockchain such as deregulation, permissionless, and pure digital native are not within the scope of discussion, but they are not opposed; The second is that RWA is Crypto and traditional finance go in the same direction, Crypto out of the circle wants to attract larger funds and institutions, and institutional funds want to break the circle to find greater digital financial opportunities, so RWA is more about discussing assets that are large enough, whether they are financial assets or physical assets, but it is not a denial that the tokenization of an item is also a generalized RWA.
【Origin of the concept】
Concept backtracking
RWA (Real World Assets) concept, from the perspective of traditional finance, the assets of the physical world include: real assets (RA) and financial assets (FA). From this point of view, RWA is more of a reflection of physical asset support, even for financial assets, which is not quite the same as the virtual asset self-circulation before DeFi.
In addition to RA physical assets such as precious metals, real estate, and bulk commodities, corporate equity and private equity also belong to the category of RA physical assets. FA financial assets mostly refer to financial products or financial derivatives supported by entities, such as bonds, ABS, REITs, foreign exchange, bills, gold (futures), etc. In fact, real assets are often non-standard products, so most of them are institutional markets, and only some derivatives of standard financial products, such as futures or ETFs, will be open to retail investors; Financial assets are mainly in the institutional market or the interbank market, and the secondary market is partly oriented to retail transactions in the retail market, which often includes issuance, underwriting, primary market and secondary market.
Asset class
Looking at the RWA asset class from the perspective of physical world assets, you can refer to the 2020 global currency and market data (USD) as a reference:
- Silver: 43.9 billion - Gold: 10.9 trillion - Stocks: 89.5 trillion - Global debt: 253 trillion - Real estate: 280.6 trillion - Derivatives: 558.5 (low) ~ 1000 trillion (high)
From the perspective of traditional asset market data, although commodities/precious metals are high-quality assets, they are not the largest, bonds are very mainstream and large-scale physical world assets, real estate is still a large physical world asset class although it is now stable or declining, and the largest is financial derivatives assets.
Due to the scale and valuation method, there is still a lack of some emerging assets that represent the future, such as AI computing power, ESG new energy and green power, etc., and it is believed that more emerging assets will appear in this market data in the near future. At present, the size of the Bitcoin or cryptocurrency market is still in the growth period compared to the scale of these traditional physical world assets.
Regarding asset investment, the US investment bank has made an asset ranking, which is for reference only: the first is US bonds, and the latter is US technology stocks, US REITs, Chinese assets, etc.
Old and New Finance
RWA is the integration of virtual assets with the traditional financial system, which is actually a positive and trend of virtual assets, which means that crypto assets are beginning to integrate or combine traditional financial channels, and bring existing financial assets to the digital native world through tokenization. For institutional clients and practitioners in the traditional financial system, they will think that distributed ledger technology and tokenized RWA assets are not cryptocurrencies, and RWA tokens can be interpreted as tokenized shares or certificates on a distributed ledger similar to existing financial assets, which can reduce their panic or resistance.
Hong Kong's new Web3 regulations, at the beginning, mentioned security tokens (STO), requiring licensed exchanges to trade one or more STO, and later more physical asset-backed security tokens, coinciding with the beginning of Defi to become popular RWA concept, and later Hong Kong Web3 replaced (or upgraded) with RWA? STO, but in fact, for the Hong Kong government and regulatory compliance, RWA is equivalent to STO security tokens.
[Background Analysis]
The big background of short money
The background of RWA may be related to the digital currency bear market, and the NFT hotspot in 2021 will also become a flower moon in 2022, and RWA has become a baton to stimulate the digital currency market. But if you look at the entire digital currency market, there are ups and downs. Under the consensus of a small scope, digital currencies are thriving, but at the same time, they are also facing a variety of intricate problems.
FTX and Silicon Valley Bank are one of the key nodes, originally a large amount of upstart money is coming into the digital currency market, but because of FTX and Silicon Valley Bank and other thunderstorms, the upstart and high-tech equity premiums are dozens or hundreds of times, and they are harvested all at once, and there is no new money and leverage coming in.
What is Old Money doing? The past two years have been all about the Federal Reserve, continuous interest rate hikes and inflation, high technology and high leverage have been broken and harvested, old money only pursues short-term funding rates, and cash is king. You can take a look at the interest rate of the 10-year Treasury bond of the United States of America and the interest rate of the 1-year Treasury bond of 5.4% some time ago, which means that the old money is no longer optimistic about the long-term comprehensive return, mainly looking at the current cash interest rate. All funds are looking for cash cow assets, which is why the global RWA concept is hot? Because RWA assets can be understood and familiarized, and RWA assets often have operating cash flow.
From the perspective of cash flow, in 2023, Warren Buffett, who is in his nineties, will fly to Japan to negotiate with several major trading companies, the core purpose of which is cash cow assets, that is, large consumption, mainly including food and beverage, trade and retail, tourism and hotels, traditional Chinese medicine, home appliances, consumer building materials, textiles and clothing, home furnishings and other sectors.
Similarly, from the perspective of cash flow, it is difficult for pure native virtual assets to have native cash flow (operating token income). As an emerging digital finance market, there is still a need for diversity and inclusion. In particular, before there is no native operating cash (token) flow, it is difficult to have pure native virtual asset financial products, and the equity tokens of pure native Web3 companies do not have a closed-loop ecology (in particular, if Web3 companies generate FIAT revenue instead of token cash flow, their equity tokens lack a pure native closed-loop ecology).
Therefore, in order to grow into a balanced financial market, diversified and multi-level financial products, both the original equity STO and the RWA that traditional capital can understand, one of the meanings of RWA is to attract old forces and old money to participate, especially institutional customers; The second is to balance the risk-free or low-risk assets in the virtual asset portfolio allocation.
Virtual asset allocation background
At present, whether it is STO or RWA, the key is PI, especially institutional customers, and retail investors cannot support the market. At present, there are only 12 licensed (1/9) asset management companies on the list of uplift's licensed asset management companies, and only when the scale of virtual asset management has expanded, and there are funds that invest in a large number of virtual assets and virtual asset portfolios, they can become institutional customers of licensed exchanges.
Institutional customers participating in the virtual asset market may be partly allocation-type, allotment pie aunt, partly transaction-oriented, quantitative secondary market, or they may develop and grow into a certain scale of intermediaries, as makers and dealers, so as to support the trading volume of the exchange. When it comes to trading volume, since the opening of HashKey, a licensed exchange in Hong Kong, has basically been around 50~60 BTC 24 hours a day, and it may be around 8~14 BTC on weekends, which is worth pondering.
In addition, institutional customers, especially Crypto funds, will definitely need portfolio allocation, and will also allocate risk-free or low-risk assets in addition to risk assets and quantitative trading assets, at which time RWA is an option, especially to attract the needs of traditional institutional LPs, because these traditional LPs may only understand the narrative or target of RWA. In addition to RWA, there will be assets similar to real estate, debt, REITs and other assets that traditional LPs can understand, and at the same time, there will often be an asset collateral structure or a repurchase commitment, which can be understood and assured for traditional funds.
【Essence of RWA】
The essence of corporate finance
As a physical world asset, RWA is essentially corporate financing, because most of the large-scale physical world assets are held by enterprises, and the subject of compliance and constraints is also dominated by enterprises, so the issuance and trading of RWA assets is largely corporate financing, which is nothing more than corporate financing based on new virtual assets and blockchain technology. If you understand that RWA is corporate finance, then you can better understand the following analysis, including the company's asset and financing transaction structure, institutional market, risk tolerance, mezzanine and stratification of asset structure, compliance constraints and professional services, information disclosure, etc. Of course, the "enterprise" of this enterprise financing can also be a digitally native distributed business, or a DAO, a Crypto Foundation.
Corporate finance requires a range of professional services, such as credit rating, legal, auditing, custody, etc. Taking the current hottest RWA asset U.S. bonds as an example, U.S. bonds are actually IOUs from the Federal Reserve on behalf of the U.S. government, the Federal Reserve is equivalent to a special enterprise, and also has a credit rating, some time ago Fitch downgraded the rating of U.S. bonds a little bit is AA+ (before the U.S. bond rating has always been AAA), of course, AA+ is still a high-quality asset at present.
There are several elements of corporate financing: the amount of financing, the financing cycle, and the cost of financing. For example, there are 3-month, 6-month and 1-year U.S. bonds, as well as 10-year and 30-year U.S. bonds, and the financing cost (interest rate) is different for different financing cycles. For corporate financing, this means that the institutional market is the first, followed by retail customers, because corporate financing needs to raise a certain amount of funds at a certain cost within a certain period of time, such as 800 million Hong Kong dollars, which requires professional services and institutional customers to negotiate under the table, that is, the underwriting bidding and placement mechanism of the coordinator and underwriter, rather than relying on retail investors to sell one by one.
Due to the support of physical world assets and the assistance of credit enhancement and compliance of corporate financing, RWA is relatively stable compared with the "sharp rise and fall" of virtual assets, and can be regarded as a low-yield risk-free asset among virtual assets. This is key to the diversified asset allocation of virtual assets, and a balanced virtual asset portfolio needs to have a reasonable allocation of medium- and high-risk, low-risk, and risk-free assets. RWA will promote a diversified portfolio of crypto investments or allocations, rather than simply speculating on coins, skyrocketing and plummeting. A reasonable Crypto fund may allocate Bitcoin and Ether as low-risk assets, or it may allocate some small currencies with new concepts and hot topics as medium and high-risk assets, expecting to obtain a hundredfold return but may also return to zero, and also need to allocate some risk-free assets such as RWA as the basic income guarantee of the portfolio. Therefore, from the perspective of virtual asset allocation, RWA is a risk-free asset that can make the portfolio more diversified and balanced.
Related Entities
The core subject of Hong Kong RWA is Type 9 asset management, which means that institutional customers of Hong Kong RWA cannot avoid Type 9 asset management and OFC. It is recommended that everyone do not go to grab the No. 7 license of the exchange license, so many exchanges have been built, there is less meat and more wolves, and it is likely to fall into the "A license to be killed" that the experts said before, and eventually the exchange will grab customers to grab assets and trade volume, and those who have customers and assets are No. 9 asset management. Asset management companies, or OFC and LPF, can not only conduct proprietary business as the PI of a licensed exchange, but also issue portfolio products of virtual assets according to filing or compliance, which means that they can act as an early mentoring institution, coordinator or part of the underwriting agency for RWA assets, and can also further do liquidity arbitrage of RWA secondary market funds. In addition, the brokerage business of Type 1 license is also an opportunity for some brokerages to expand their virtual asset brokerage business.
Based on Hong Kong's new Web3 regulations and Type 9 asset management, we have fully communicated with brokerages, banks and insurance companies in the mainland around RWA, including leading brokerage institutions, commercial banks, insurance asset management, etc. In terms of asset allocation, traditional asset managers are very interested in Bitcoin and Ether, two mainstream digital currencies, but they will hesitate to comply with the channels and methods; For RWA, the first thing they think about is whether their high-quality corporate customers can issue digital bonds or digital REITs based on RWA. Second, they will hesitate to compare traditional bond issuance and ABS with RWA, what are the differences or incremental value? From the perspective of institutional clients, they don't have much sense of whether they will participate in the underwriting, placement or secondary market of RWA virtual assets, but they believe that the recent progress of Bitcoin spot ETFs will promote their cognition.
Asset characteristics
RWA itself does not increase liquidity, and the reason why it has become a hot choice is because of several characteristics of RWA assets: stability and interest-bearing, but what often attracts institutional customers is that in addition to stability and interest-bearing, there is also high liquidity, and liquidity or short-term funds can be in and out at any time. So why have U.S. bonds become RWA hotspots? This is because U.S. bonds have the characteristics of stability, interest-bearing and high liquidity, and high liquidity is reflected through U.S. bond ETFs, especially the current short-term, medium- and long-term interest rate differentials can also form an arbitrage space for interest rate swaps. Therefore, the launch of the Bitcoin spot ETF means high liquidity, and the most important thing is that most of the funds are staring at short-term cash flow in the current context, and natural liquidity is important.
There is no right or wrong between the pursuit of stability and the pursuit of volatility, different investors have different risk aversion and risk tolerance, and at the same time have different demands for interest rates, so that there is room for interest rate swaps or arbitrage whether they are long or short, and these interest rate swaps and arbitrage create liquidity. So, one of the successes and failures of RWA is how to make high liquidity?
Gains on assets
Although most of the current RWA products are based on U.S. bonds, in fact, the main model of RWA is not the on-chain of assets, but the tokenization of assets' returns, cash flows, and expectations. Taking several U.S. bond RWA products of the head Defi as a reference, they basically use U.S. bonds or U.S. bond ETFs as the underlying assets, and the second layer tokenizes the income share, or continues to make a layer of yield tokens (Yield Tokens) or digital native tokens of arbitrage protocols (Protocol).
This means that the key to RWA is not the asset on the chain, but the income of RWA assets, that is, the operating cash flow, which can be the operating token on the chain. It is still difficult to put the assets of the physical world on the chain and achieve 100% mapping; However, the income or cash flow will be less difficult in the SPV or DAO on the chain.
RWA's yield token, or arbitrage protocol, is not native to the void. In fact, the U.S. bond and even corporate bond markets are already very large, with rich asset classes and sophisticated businesses, and decentralized tokens or protocols are to find pain points, problems or arbitrage space brought by new technologies from these original market spaces. For example, the bond market has a huge interbank market, or a large transaction OTC, there is an overnight reverse repo bond collateral, etc., which may contain the possibility of new yield tokens or protocols, so that new RWA products can be designed to really attract these old money institutional customers to be willing to come in and try.
RWA test
To discuss the essence of RWA, especially in combination with the two premises at the beginning, I hope that everyone will work together to promote the real RWA product and market. However, there is always the question of whether this is RWA or not? Why doesn't this count as RWA?
Here, we have compiled a RWA's Howey Test, modeled after the Howey Test of Securities:
1. Is it a trading investment in RWA instead of collateral - it's very simple, replace U.S. bonds with BTC and Ether, and see if the product has any impact? If there is no impact, it is not a true RWA; 2. The investment is based on the generation of expected returns - the income of RWA and its derivatives are the main profits, not the ancillary income of pawning RWA assets as collateral. If the return of a RWA asset fluctuates and does not affect the return of its product, it is not a true RWA; 3. The investment is for Real World Assets' trading structure - is the issuance, structuring, pricing and liquidity trading of RWA bonds or financial products in the product structure? If the product structure does not include the trading structure of the physical world assets, the physical world assets are only the underlying assets, and the product trading structure has another set, then it is not a real RWA; 4. The benefits are generated from the efforts of the issuer or a third party - the income of RWA comes from the efforts of the asset issuer or a third party, and the fluctuation should be the income of RWA or derivatives, rather than the premium of other platforms of RWA.
【RWA Product Design】
This section focuses on RWA product design patterns.
At the beginning, we talked about the premise of not dwelling on RWA and digital native assets. Of course, since RWA is being discussed, from the perspective of RWA, in fact, a lot of innovation often comes from within the old world or on the edges, and it will not be a complete change from the sky.
Three-layer structure
The main model of RWA that we discussed earlier is to use RWA assets as the underlying assets, and the second layer as digital native tokens such as yield tokens or arbitrage protocols. Combined with the cross-border integration of the token economy model and asset securitization, we suggest that RWA can be divided into three layers: 1-underlying assets, 2-income or arbitrage model, and 3-structured.
RWA, as a security token of physical world assets, is not just a simple physical asset on the chain and then issued a security token, but is divided into three levels: from the underlying asset, to the type of expected return, and finally the structured design of the securities.
1) The underlying assets are easy to understand, just like U.S. bonds or real estate, the current popular defi head RWA products are basically tokens or protocols that use U.S. bonds as stable underlying assets to do income and arbitrage. At this level, real estate is no longer a good basic asset at present, why is it the first U.S. bond? It was mentioned earlier because one is stability and the other is cash liquidity. If the Bitcoin spot ETF passes, then the Bitcoin ETF will also become a special RWA base asset, and the digital native token will first become the real world asset ETF and then the RWA base asset.
2) The yield token or TRS protocol is designed around RWA assets and income based on the cash income or expected return of the underlying asset and the premium arbitrage space, and the yield token or arbitrage protocol can be combined with the income type, cycle, form, stratification, leverage and multi-repetitive interest of RWA assets.
3) The tokenization structure design is to draw on the structure of asset securitization and blockchain technology, and realize the smart contracts and codification of income tokens, smart compound interest, smart arbitrage, etc. through smart contracts, SPVs, etc.
Defi's RWA attempt has given us a good inspiration to use RWA as a base asset and innovate new tokenized arbitrage protocols and yield tokens on top of this, isn't this a digital native token? Looking at those Defi RWA products, RWA assets are not digital native tokens, but yield tokens derived from the underlying asset chain are not digital native tokens.
For those of you who are still struggling with digital native tokens, you can think again: does Bitcoin look like an RWA that tokenizes energy (electricity) into Bitcoin?
RWA Product Design Pattern Reference
From this three-tier structure, many RWA product models can be deduced, of course, this also requires different angles and different participating institutions to jointly innovate the most suitable RWA product model. In my "Token Economic Design Model", I have summarized ten models of industrial tokens: currency, traceability, points, mining machines, assets, data, content, services, fans, storage and other modes.
(Fig.1 "Token Economy Design Model")
But for RWA product design patterns, here are some product design patterns based on the three-layer structure reference:
1) Stablecoins mortgage RWA, with RWA assets, especially U.S. bonds, as the underlying assets and interest-bearing assets, most of the current Defi head RWA products are in this model, and there are different types of subdivisions, such as underlying asset pledge, Fund, SPV, etc.; 2) Tokenization of asset securitization, based on the yield or expected yield design of RWA assets, can be Fund type, ABS type, and cash distribution REITs type 3) RWA asset linkage model, on the basis of RWA income, combined with the lifestyle or consumer IP corresponding to RWA assets, iteratively design Yield farming of mining mode 4) RWA derivatives, and design RWA derivatives based on the pain points of traditional financial markets, For example, reverse repo mortgage financing of bonds, stratified A/B Token of fixed income, etc. 5) The expected premium of emerging assets is reflected in the dual design of current returns and future expectations of emerging assets, and the use of income bonds or part of the equity of ST+ part of the expected/governed UT or NFT6) Green finance RWA, green bonds, carbon assets and green energy around carbon emission reduction and carbon footprint, are generally designed as fixed income bonds, and can also be ST+UT models, which are European, American, 7) Digital equity RWA, a digital equity RWA that is preferred by Middle Eastern funds, is not just equity, but a combination of the DAO organizational structure of digital native business, and the design of digital equity RWA tokenization in combination with income: "DAO + stablecoin cash flow + Token"
Due to the issue of space, it will not be expanded, and the detailed product design pattern will be expanded in the later series of topics.
RWA solves pain points
RWA has to combine physical world assets and traditional financial models, as well as virtual assets and digital native tokens in the new world rules, and these cross-border integrations and conflicts also bring difficulties to RWA products. When we're talking about RWA products, we're talking about how to attract more agencies, and we're always asking these two questions:
- Where is the incremental value of RWA?
- Where is the endogenous value of RWA?
Yes, traditional institutional and enterprise customers won't come in without incremental value; Without endogenous value, RWA products would not be different from products such as traditional bonds, especially the expected premium.
We have compiled some of the pain points of the traditional financial market, which can be used as a reference for RWA product design:
1) Cross-market and globalization
Most traditional financial products, such as bonds, are often limited by the trading market and trading hours
2) Efficiency/time
The traditional interbank market and block trading OTC transactions are inefficient, and the settlement time cycle is relatively long
3) Transaction costs
The transaction cost of securitized products such as debt is relatively high, and if the transaction cost is reduced, it will attract more transactions or swaps
4) High valuations of emerging assets
For emerging assets such as new energy and AI computing power, it is difficult for traditional financial evaluations to give high valuations that meet future expectations, which is actually a kind of expected consensus tokenization
5) Pricing model
The pricing of traditional financial products is relatively centralized, and the pricing and offering are carried out through traditional methods such as advance mapping and bidding, lacking an open consensus pricing and risk sharing among participants
6) Inclusive
RWA products lower the investment threshold through share-sharing and other means, so that more people can participate in the return of high-quality assets
7) Transparent
Products such as traditional bonds or bills often have risks such as opacity and fraud, and if converted to on-chain transparency, it can significantly improve investment security and reduce fraud and other contributions
If you are interested, you can pay attention to several RWA cases in Hong Kong: one is the monetization framework of Hong Kong's green bond market, which embodies a traditional green bond business and the practice model of tokenization proofing and running through the institutional market, in which different roles such as issuers, underwriters, custodian banks, cash token managers, CMU registered agents, and investors are worth reflecting on; The other is the real estate closed-end fund token STO issued by Vanguard Asset Management, which corresponds to the tokenized rental income and future property appreciation of five retail properties in the tourist hotspot of Prince Edward, Kowloon, and is only for PI, and no detailed prospectus or compliance details have been seen yet.
As for the case of real estate STOs, our overseas property STO projects and European and American real estate STO cases are detailed in the book "Asset Tokenization", which can be used as a reference.
(Figure 2 "Asset Tokenization")
【RWA Ecology】
Institutional market
The success of RWA lies in the establishment of an institutional market ecosystem, institutional clients or funds that invest in digital assets and RWA, as well as an ecosystem service group. Therefore, do not expect that only one or a few licensed virtual asset exchanges will be able to build the virtual asset and RWA market.
In Hong Kong's new Web3 regulations, Type 7 virtual asset exchanges are the key and most valuable licenses, but the trading scale of licensed exchanges must rely on RWA and institutional customers.
Why?
First, it is difficult for the native UT digital currency of a licensed exchange to expand the scale of transactions, especially beyond the native trading platforms such as Binance OK, and the only opportunity is in RWA, because the scale of RWA assets is large enough, and the traditional bond issuance and ABS of an asset package for corporate financing start at 500 million, while REITs start at 1 billion;
Second, institutional customers are the core support of a trading market, because it has a high risk tolerance, a relatively mature investment strategy, and investment research capabilities, which can help retail investors eliminate information asymmetry, and can form the pricing power of RWA products based on investment research and pre-sale matching.
Institutional clients are required for the exchange
Of course, those who come from digital currency exchanges like retail investors the most, so Hong Kong licensed exchanges should not abandon PI but apply for retail licensing as soon as possible. But on the contrary, licensed exchanges need to establish an institutional market ecology in order to drive the retail market.
If the exchange is dominated by RWA, RWA will need to have its own digital investment fund, digital brokerage or investment bank, digital trust, including insurance funds (insurance asset management) that are interested in RWA products, and even offshore funds such as the Middle East, so that it can expand its scale. A RWA project has formed good liquidity from underwriting issuance, cornerstone investment, strategic matching, to the Shanghai exchange, and then to secondary market funds and retail retail. On this basis, there are supporting service providers or derivatives institutions to further expand RWA derivatives such as mortgage lending agreements, interest rate swap agreements, and arbitrage agreements around RWA products to promote arbitrage and liquidity.
Institutional client distribution chart
Focusing on institutional clients, we compare the distribution of institutional clients of the latest infrastructure REITs as a reference for RWA institutional clients, and as REITs with mature corporate financing models, their institutional clients are mainly insurance funds, securities, asset management, industry, trusts, funds, banks, and overseas.
(Figure 3 Distribution of institutional customers of infrastructure REITs)
However, the primary market for institutional clients may not be suitable for centralized exchanges, and the primary market can be used first and then the secondary market. Generally, corporate bonds or REITs products are underwritten first, followed by cornerstone and placement, or bidding and bidding, etc., to ensure the issuance scale through the institutional market; Concentrate retail transactions in the secondary market. The primary market, which can be used well to ensure the scale of product issuance, is also suitable for private equity, investment banks, securities companies and other ecosystems to "pull down". Since the institutional market is similar to the interbank market, which does not require a centralized trading system, it can be considered to combine the product features of RWA and blockchain technology to build a set of business models or trading protocols for the virtual asset inter-institutional market, or the digital asset section of the Hong Kong Stock Exchange can consider the RWA primary market, which is of very special significance to RWA.
Information asymmetry and investment research reports
Institutional clients of RWA projects can not only solve the problem of financing scale, but also solve the problem of information asymmetry.
It is generally impossible for the project party to directly face so many retail investors, even if it is a digital native token or NFT project, it is through a large number of communities, DAOs or KOLs to communicate and educate Hodl (holders) in different ways and channels. As a relatively professional project, RWA especially involves the evaluation, pricing and structuring of large-scale physical world assets, which requires the virtual asset investment and research capabilities of institutional investors, and the institutional investment research report can be used as a guide for investment strategies, and can also truly form the pricing power of RWA products, because at present, because the project party and investors are pricing on their heads.
If it's not easy to understand, you can think about whether the most common thing retail investors read when trading stocks is the investment research report of Three China and One China? We can't see a certain company or a certain track clearly, but the investment research report of the institution has been analyzed in detail, which avoids the risk of information asymmetry for retail investors.
Institutional clients provide information empowerment for the retail market through investment research reports and investment strategies, and it is possible to obtain the support of a large number of retail investors or qualified investors like Sanzhong Yihua, so as to further attract the support of a large number of project parties, and such institutional intermediaries have the potential to become giant middlemen, then it can not only do underwriting but also do secondary trading, and it is not excluded to become the issuer of Hong Kong Bitcoin ETF or RWA ETF. Of course, for licensed exchanges, this can be a guide fund for a licensed exchange, or a digital investment banking intermediary that has developed.
RWA derivatives
There will also be a large number of supporting service providers or derivatives institutions in the RWA ecosystem. If combined with the technology of blockchain, combined with the business characteristics of some RWA issuance and underwriting transaction models, a specific smart contract or protocol is designed as an inter-institutional market alternative before the centralized trading retail market, and there are governance tokens and other cooperation, which is more Web3 significance.
RWA's asset management company (No. 9 license) or OFC will participate in the primary market and secondary trading of RWA products, and may also launch a fund to invest in a certain RWA product, or invest in a certain track such as real estate or new energy RWA portfolio, or it can be a regular investment product, intelligent compound interest product or RWA pledge and repurchase and other products and services, and can also provide quantitative trading in the secondary market for mature RWA products, so as mentioned above, a No. 9 asset management company will be a key link in the RWA ecosystem.
Information disclosure and investment orientation
At the same time, from a regulatory perspective, RWA projects need to establish an on-chain information disclosure mechanism, as a supplement to chainlink oracles, not necessarily real-time on-chain uploads, but instead of using the proactive information disclosure after bond issuance or listing, to achieve on-chain information openness and transparency, reflecting the compliance and endorsement of licensed exchanges.
Indispensable in the RWA ecosystem is the Maker market maker, which may have developed from middlemen. The liquidity of RWA is sometimes "made", and the rate of return is not the core, the key is the product design and trading system, such as 4.5% rate of return, 3+2 fixed income products, and cash distribution products that pay dividends every quarter, the liquidity is different; In addition, large middlemen come in, institutional clients invest largely, and there are rich and detailed investment research reports, and the investment strategies and liquidity of retail investors are different.
RWA products will enable virtual asset exchanges to take into account investment strategy orientation, fairness and pricing power. Warren Buffett currently only invests in large consumer cash cow (RWA) assets, which is an investment orientation in itself, and this kind of institutional customers are very valuable to retail investors, as for how to convert them into smart contract products, such as institutional indices or whatever, it is a matter of product design. We, retail investors, only need to consider risk appetite and appropriateness; For licensed exchanges, these factors need to be considered, after all, it is necessary to increase the scale, liquidity, and the endorsement of institutional customers.
RWA Digital Investment Bank
The maturity of the RWA ecosystem is manifested in the development of RWA digital investment banking. RWA digital investment bank will have strong track (industry) brand operation and management capabilities, through the digital industry capital (Crypto RWA Fund) to realize the raising, investment, management and withdrawal of RWA assets in the investment banking model, raise Crypto RWA Fund, invest and incubate related track enterprises (assets), issue RWA products, continue to achieve premium in the distribution of continuing operating rights and brand building, continue to acquire assets for RWA expansion or issue new RWA products, and realize and exit rolling continuous investment. In the raising, investment, management and withdrawal of RWA assets, you can also design your own Token model based on brand IP, asset governance, equity release, etc.
The most typical examples in this regard are CapitaLand and GLP in traditional industrial investment banks. CapitaLand has strong brand operation and management capabilities in commercial real estate and GLP in logistics and warehousing, and realizes fundraising, investment, management and withdrawal through the industrial capital investment banking model, and lays out in stages: private equity fund + industrial management and operation + IPO + REITs, forming a capital cycle. For example, CapitaLand has dozens of private equity funds, corresponding to asset packages and releasing part of the equity/share to insurance funds, pension funds, etc.; 2 Singapore-listed companies: CapitaLand Group and CapitaLand Investment; 6 Singapore REITs. Both listed companies and REITs can issue additional mergers and acquisitions as one of the exit channels for assets, or the assets can be listed separately. In 2021, after packaging 6 Raffles City projects in China, part of the equity was released to Ping An Insurance to achieve more than 30 billion cash returns, and then large-scale mergers and acquisitions of new digital economy assets such as data centers in first-tier cities.
To sum up, the core of the development of the RWA ecosystem lies in the fact that RWA should be able to combine virtual assets and smart contracts to provide them with incremental benefits for the asset side, the funding side, and the institutional customers, that is, what traditional financing does not have, so as to continue to grow and promote the expansion and maturity of the RWA ecosystem.
【RWA Assets】
Traditional assets
RWA products and ecosystems are inseparable from their underlying assets, and in addition to U.S. bonds, Hong Kong currently has real estate, but real estate is actually not the best asset. The ranking of investment assets given by the US investment bank: US bonds, high-tech stock ETFs, North American REITs ETFs and Chinese assets, etc., can be used as a reference for RWA's underlying asset classes.
In fact, old assets from a cost-and-return perspective are a thing of the past, US bonds are more stable collateral, real estate investment strategies have been adjusted, and commodities such as agricultural products or precious metals are often financial derivatives such as futures or ETF indices rather than spot assets. Taking North American real estate REITs as an example, BlackStone Group is the largest REITs investor, with a real estate trust fund BREIT (Blackstone Real Estate Income Trust) of $125 billion and a total net return of about 10.8%. Blackstone Real Estate's latest investment strategy has been realigned, shifting its portfolio from headwind-driven assets (traditional offices and shopping malls) to operating cash flow real estate such as logistics, rental housing, hotels, laboratory offices and data centers.
For RWA, it is more suitable for real estate rather than real estate. Real estate asset securitization often has operating cash flow, such as shopping malls, hotel apartments, industrial real estate, logistics warehousing and data centers, etc., these are relatively stable assets, and the United States is the same, real estate-based REITs are very large, and Blackstone and Blackrock have allocated a large number of real estate REITs.
(Figure 4 Financial Model for REITs to Achieve Public Asset Securitization)
Emerging assets
However, the valuation and financing of traditional assets such as real estate are very mature and standardized, and it is difficult to have the opportunity to premium or multiply. Ten times and 100 times the opportunity, may not only be those pure Web3 tokens that rise out of thin air, but based on the support of physical world assets, especially new assets that move forward with human society, such as AI computing power, new energy, new materials, carbon neutral assets, etc., emerging assets are based on, the future is expected to be clear, the consensus is available to the old and the new, and new token protocols or securitization products may be the real opportunities for RWA.
These emerging assets, because new, but also themselves are digital and in-network, if you want to be chained, switching or upgrading is relatively simple. Because of the new, the existing securitization valuation methods are not suitable for these new assets: the market method, which is not yet mature and the market is not legal; Cost method, cost method and traditional old assets, especially real estate, compete with the cost of assets, too much loss; The income approach has not yet formed a stable cash flow. Therefore, it is difficult to have a reasonable valuation of emerging assets according to traditional stubborn methods, and this, which happens to be the advantage of RWA security tokens, can be used in many ways to design future premium expectations, etc.
RWA asset class recommendations
We've put together a list of asset classes that fit RWA for reference:
1) U.S. bonds and sovereign bonds of some countries 2) Bitcoin and Ether spot ETFs 3) Real estate and infrastructure with operating cash flow 4) AI computing power data center 5) New energy energy storage, photovoltaic hydrogen energy, carbon credits, etc. 6) Carbon assets, carbon footprint and carbon passport 7) New space, aerospace and satellites, space, earth and people, vehicles and Internet of Things 8) New materials, superconducting materials, rare earths and other strategic materials, new materials to reduce costs and increase efficiency9) IP licensing business, brand film and television culture IP and business + cultural tourism, variety show and performing arts +10) Bitcoin Computing Power, Tokenization of Bitcoin Cloud Computing Power Mining and Investment Income11) Integral assets, the most common corporate liability assets, tokenization or NFTs of points/gift cards
【Hong Kong RWA】
In addition to the joint preparation of RWA Fund and digital investment bank incubation and investment investment projects, we will also join hands with brokerages and banks to launch the Financial Interbank Web3 Association (DAO) to promote new and old financial friends who are interested in RWA, organize more private and close private board meetings, RWA business discussions, product design and project cooperation, etc. If you are interested, you can participate together (WeChat/Twitter: YekaiMeta).
The core significance of Hong Kong lies in entrepot trade and entrepot finance, which connects mainland assets and overseas capital. Similarly, for Hong Kong RWA, the core is still the RA/FA assets in the Mainland, including institutional clients and funds in the Mainland (especially the Hong Kong branch of the Mainland institutions), as well as overseas funds or assets. In addition to operating real estate or infrastructure, there are also a large number of large consumer assets or equities, new energy and new material assets or equities, which are the targets of overseas funds or funds.
Trade market opportunities
There are great opportunities for licensed platforms in Hong Kong, but it is also important to be able to seize them. Licensed virtual asset exchanges should pay more attention to RWA, and I am more optimistic about a licensed exchange platform with RWA as the theme. Only RWA can promote the institutional market ecology and underlying infrastructure of Hong Kong's virtual assets, including compliant public chains, stablecoins and e-HKD. At the same time, RWA will promote brokerage investment banks, as well as professional service institutions such as custody, rating, auditing, and law firms that focus on the investment, trading and services of RWA assets, and the issuance and underwriting of RWA assets, as well as the primary and secondary markets, can also drive the development of more compliance channels for institutional clients such as virtual asset management, insurance funds and trusts, especially mainland institutional clients.
In the context of Sino-US decoupling and political correctness, it is unlikely that Hong Kong will return to its status as an international financial center by relying on traditional finance, look at the daily trading volume of the Hong Kong stock market and the Hang Seng Index and compare the data in 18/19. The current opportunity may be in digital finance and green finance, virtual assets have no borders and political correctness, and every big pie aunt does not indicate whether it is pro-US or pro-China; ESG and carbon neutrality are advocated by Europe and the United States, and green is politically correct and there is no problem with it. It will take time and opportunity for European and American funds to withdraw and come back, but some friendly sovereign funds, especially the sovereign funds of the Middle East tyrants and the government investment boards of the Gulf countries, should be the focus of Hong Kong's RWA and green finance. In August, we went to Dubai to visit relevant institutions and funds, and fully felt the openness, warmth and friendliness of Dubai.
Hong Kong policy and regulatory opportunities
Whether Hong Kong can stay or go out depends on the entire ecology. The attitude of the Hong Kong government and regulators has been very positive, focusing on Web3 and RWA, the Chief Executive, the Economic and Financial Secretariat, the Hong Kong Monetary Authority, the Securities and Futures Commission and other relevant high-level and institutional statements have been frequent, and relevant legislators have also taken frequent actions.
From Hong Kong's previous OFC/LPF policy, to the new Web3 regulations and virtual asset licenses, to the regulatory framework for stablecoins and the e-HKD system under discussion, as well as the newly established Hong Kong "Temasek" investment company and science and technology innovation fund, these are some of the measures that are compliant and necessary.
However, it is interesting that several major families representing Hong Kong's real industry (especially real estate + manufacturing/trade and transportation) have not yet had a clear attitude and action; At the same time, perhaps due to compliance constraints, Hong Kong has not made a big move north to engage in in-depth interaction and "investment" with mainland financial institutions.
At the level of the trading market, the licensed virtual asset exchange has just begun, except for HashKey's business at the end of September, OSL, which got the Type 7 license early, has not yet opened its business, although there are still a number of exchange institutions in the process of applying, but there are still relatively few virtual asset management companies and licenses no more than 12.
At the same time, the Hong Kong Stock Exchange has slowed down its actions in the virtual asset sector, and the two Hong Kong Bitcoin futures ETFs launched before have no splash, no over-sale, and no sound. If the Hong Kong Stock Exchange can innovate products around green carbon sink ETFs and Bitcoin spot ETFs in the virtual asset sector, it will further promote the landing and development of Hong Kong's RWA.
Hong Kong Stablecoin vs. RWA
Hong Kong's stablecoin regulatory framework will also be a key element of RWA. In the Hong Kong Green Bond Token Framework, we can see that there is a transitional "token" called "cash token" that acts as an intermediary currency between the token and the fiat currency. RWA is corporate financing, and the current demand for corporate financing is still fiat currency, so the market-oriented Hong Kong stablecoin and the Hong Kong government's e-HKD are the key to the capital flow and conversion of RWA.
With the Hong Kong stablecoin and e-HKD, the RWA project may have the operating cash flow of the project, which is the cash flow of the stablecoin or e-HKD, which is very beneficial for structural tokenization. As the scale of RWA assets becomes larger and more stable, then under the regulatory framework of stablecoins, market-oriented stablecoins may appear stablecoins anchored to a basket of RWA high-quality assets (including or combined with Bitcoin Ether ETFs, etc.), which can be called RWA stablecoins at that time.
RWA Opportunity Point
The significance of RWA licensed exchanges may be epoch-making. From the perspective of corporate financing, enterprises in different eras correspond to different exchanges, the New York Stock Exchange corresponds to traditional enterprises, and the NASDAQ corresponds to Internet high-tech, because the valuation method, pricing strategy, PE multiple and trading system of the New York Stock Exchange are difficult to reflect the value of Internet high-tech, so the NASDAQ appeared; The RWA exchange corresponds to emerging assets and virtual assets, and it is difficult for the NASDAQ to give a suitable or reasonable valuation and trading system for carbon assets and virtual assets, so the RWA exchange will inevitably become an exchange in the new era.
RWA products will promote the development and growth of ecosystems such as "RWA licensed exchanges + RWA projects + stablecoins + institutional markets", and the early layout of the RWA market, especially the No. 9 asset management, is the focus.
It is also a key opportunity for licensed exchanges to cooperate with the Hong Kong Stock Exchange and work with relevant institutions to study the landing of Hong Kong Bitcoin spot ETFs on the occasion of the launch of North American Bitcoin spot ETFs.
Compared with U.S. bonds, we can consider more sovereign bonds of countries with superior funds, such as the sovereign bonds of Gulf countries, based on the liquidity market of RWA exchanges that provide sovereign bond pledge RWA or pledge financing RWA and revolving investment, so that Middle Eastern funds can follow the sovereign bonds in the Hong Kong RWA exchange and asset pool for revolving investment and arbitrage.
Hong Kong has always been a very special financial market, not just now. Some people are pessimistic and leave, while others are still insisting on finding a new path, which seems to have been replaced by the Western system and reborn by emerging assets.
From the perspective of appropriateness, there is no financial product that cannot be sold. What about virtual assets that represent the future trend? Compared with the virtual currency of Web3.0, RWA is more of a reflection of the pragmatism and moderation (compromise) of Web2.5, and we should not be easy to sing, not easy to fanatical, not to be a tool for speculators, but to actively participate in the opportunity of virtual asset transformation!
I believe that Hong Kong's RWA, supported by mainland assets and funds, will be even better tomorrow!