Domestic RWA application compliance research

I. Overview of RWA

RWA is the abbreviation of Real-world Assets, which literally means real assets. In the process of asset tokenization, it corresponds to digitized digital assets. After the assets on the traditional ledger are tokenized, they are traded on platforms based on emerging technologies such as distributed ledger technology (DLT). Asset tokenization has the advantages of lowering the investment threshold, improving the efficiency of asset use, and improving the collateral attributes of assets, but it also brings new transaction risks. First, the current asset representation is mainly driven by the private sector. The requirements of various asset tokenization platforms in terms of technical paths, tokenization standards, and compliance requirements are different, resulting in the market segmentation phenomenon that tokenized assets can only be traded on specific platforms; secondly, the transaction of tokenized assets lacks a safe and reliable payment medium, and the combination of real assets and tokens deepens the connection between the crypto asset market and the traditional financial market, amplifying financial risks.

II. Domestic policy requirements related to RWA

In recent years, China has stepped up supervision of tokenized assets. In 2013, the People's Bank of China and five other ministries and commissions issued the "Notice on Preventing Bitcoin Risks", which regarded Bitcoin transactions as a normal "commodity trading behavior" and "ordinary people have the freedom to participate on the premise of assuming their own risks". In the "Notice on Preventing the Risks of Token Issuance and Financing" issued by the People's Bank of China, the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission in 2017, token issuance was identified as an illegal public financing behavior. The "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued in 2021 maintained this characterization, characterizing domestic and foreign virtual currency-related business activities as "illegal financial activities" and "strictly prohibiting them and resolutely banning them in accordance with the law". The tightening of regulatory policies is mainly due to two concerns. One is that the tokens issued by non-monetary authorities may disrupt the currency market and threaten the dominant position of the legal currency RMB; the other is the concern about the financial risks such as illegal financing that may be caused by the issuance of tokens, as well as the illegal sale of token tickets, illegal issuance of securities, financial fraud, pyramid schemes and other illegal and criminal activities associated with them.

The country has adopted a regulatory policy of strengthening local implementation by all departments, prohibiting financial institutions and non-bank payment institutions from providing activities related to virtual currency, and strengthening the registration, filing and information detection of market entities related to virtual currency.

3. NFT as a pioneer application of RWA

NFT is the abbreviation of Non-Fungible Token, which literally means non-homogeneous token. It is a unique digital identifier recorded on the blockchain to prove its authenticity and ownership. NFT uses blockchain technology to digitize information carriers such as paintings, photos, and even music, forming a unique and irreplaceable digital equity certificate that carries specific information. As an innovative application of blockchain technology, NFT provides a new model for copyright confirmation and trading of artworks, so it is also called digital collections in China.

Since 2012, many industry brands and digital collection platforms have linked NFT with RWA. PEFTK's early business was to design and produce digital collections (NFT) such as virtual shoes and virtual clothing, and later launched virtual mission digital collections. In 2023, PUMA will link NFT to RWA, and make physical sports shoes into digital sneakers NFT for sale. Buyers can redeem physical sports shoes within a one-month redemption period. Domestic NFT platforms are also following this track. The Mondal digital logo artwork launched by the Henta Digital Club platform combines the Mondal digital logo artwork with the place name trademark use license. Moutai launched Xunfeng Digital World to link NFT with Moutai physical objects through digital fingerprints. Jiang Xiaobai, Snow Beer and other wine brands have also launched similar activities.

The combination of NFT and RWA can solve the difficulties that both of them face in their current development process. As a digital asset, NFT benefits from the technology of the digital world, but is also limited by the digital virtual world. It is difficult for it to directly touch real life. Most of the existing NFT products in China cannot be traded twice and do not have strong liquidity. The value attribute of NFT digital works mainly lies in the display of rights and interests, and appreciation and collection are the secondary purpose of the buyer. Therefore, from the perspective of balancing interests, the transfer of NFT certificates after the appreciation of rights and interests, that is, the resale after the first sale, is more worthy of discussion. RWA can make up for this defect and clearly give NFT value in the real world. From the "Initiative on Preventing NFT-Related Financial Risks" issued by the China Internet Finance Association, the China Banking Association, and the China Securities Association in 2022, my country recognizes the legality of NFT, but also points out that NFT also has "risks such as speculation, money laundering, and illegal financial activities", and NFT transactions cannot be transformed into financial products. Therefore, RWA can start with asset categories in NFT that are less related to financial security. For example, ordinary digital artworks with low value but wide application can be used as early explorations of real asset tokenization.

IV. Prospects for the domestic application of RWA

1. The central bank should conduct relevant research and technical reserves on the unified ledger and establish an official financial infrastructure.

The concept of the unified ledger proposed by the Bank for International Settlements (BIS) is to establish a new financial infrastructure, integrate central bank digital currency, private digital currency and tokenized assets on the platform, use the programmability of DLT technology to achieve automation and seamless connection of transactions, and settle with central bank digital currency to ensure currency unity and settlement finality, and ensure the subjectivity of legal currency RMB in the currency market.

The unified ledger consists of three parts: data environment, execution environment and common governance framework. It can realize the functions of data storage, smart contract execution and management, and ensure the confidentiality and security of transactions. Through the unified ledger, the central bank can put the domestic token trading market under its own supervision.

2. Domestic financial institutions should improve the valuation and pricing capabilities of domestic digital assets

If RWA is officially implemented in China, with the development of digital technology, the scale of the digital asset market will expand, and more high-quality assets off the chain, especially traditional financial assets, will be developed on the chain, and the traditional financial system will also need to be promoted accordingly. The "Initiative on Preventing NFT-Related Financial Risks" raised concerns about "falsely high prices deviating from the basic law of value", so relevant financial institutions should establish a new digital asset management model to effectively evaluate and record digital assets, improve the valuation and pricing capabilities of digital assets, and correctly guide market transactions.

3. China should formulate relevant laws and regulations such as blockchain transactions to guide the operation of the industry

RWA is a new business model after all, involving complex and novel digital markets and blockchain assets. The current laws have not yet clearly stipulated the relevant processing basis for financial assets registered, issued and traded on the blockchain, and it is not yet completely clear whether RWA is within the existing regulatory scope in the issuance and trading stages, including possible new risks. The security and accuracy of on-chain assets also need to be properly supervised. As a pioneer in the transparency of crypto assets, the EU Council, composed of ministers from 27 EU member states, approved the Regulation on Markets in Crypto Assets (MiCA) on May 16, 2023. The draft was proposed by the European Commission in 2020 and will be implemented this year. my country can learn from the EU governance experience and formulate RWA laws and regulations that are in line with my country's national conditions.