Authors: Lawyer Liu Honglin, Lawyer Liu Zhengyao
01. Industry Development
China's attitude towards virtual currency regulation is quite clear:
This thing is not currency, at most it can only be a commodity;
Since it is a commodity, it cannot have financial attributes and cannot be speculated.
It can be said that by grasping these two red lines, 99% of the pitfalls for blockchain entrepreneurs in China can be avoided.
However, the temptation of issuing tokens is irresistible, and friends who are considering issuing tokens are endless. The banner they carry also evolves with the industry's development. In the past few years, it may have been ICO, and after ICO was banned, it became STO. After STO cooled down, the new narrative is RWA.
RWA refers to the transformation of real-world assets into tradable digital tokens through blockchain technology, thereby achieving decentralization, transparency, and efficiency of assets. The advantages of RWA tokenization include reducing transaction costs, increasing asset liquidity, expanding the investor base, and increasing asset value. Its application scenarios include real estate, finance, art, and other fields.
From the definition, RWA is a very promising and lucrative thing. However, if the product is not used according to the instructions after leaving the factory, it will be a bit troublesome.
02. What Project Parties Are Doing
Believe it or not, the best application of RWA in China is actually by friends who are engaged in NFT digital collectibles entrepreneurship. It is not an exaggeration to say that it is the RWA entrepreneurship V1.0.
In the industry, it is called empowerment. For example, if you purchase an NFT digital collectible issued by the project party, you will have the right to exchange for certain goods/services; if you do not want to exchange or redeem, what can you do? You can wait for the real-world assets to appreciate and then transfer them to other interested friends through the consignment market.
Theoretically, this storytelling is quite logical and good. It provides more sales scenarios for sellers and more reasons for buyers to hoard and purchase, especially for goods that may appreciate over time, such as tea and liquor.
Some friends may say that what you are talking about is not RWA, but what I want to express is that the form changes but the essence remains the same; it's just a matter of different model parameters.
In such a model, a real-world asset with a stable price or slow growth may have a stable supply and demand relationship in the traditional market, and it is difficult to bring about a leap in value by tokenizing it. On the other hand, if the pricing range of something is quite mysterious, such as a digital artwork, different people have different preferences, Zhang is willing to pay 3 units, but Li is willing to pay 500. If it can allow both parties to freely reach an agreement, that's great, but if Li is someone who has manipulated the price in the market, then it is likely to be risky.
Therefore, in these two scenarios of RWA, the former is likely to be difficult to be accepted by the market because of the limited investment returns, while the latter is likely to be harmed due to its strong financial attributes.
03. Dilemma of RWA Entrepreneurship
Some time ago, the legal team of Lawyer Man Kun received a case, which can be described as a vivid example. The general situation is as follows: a company registered a company overseas, and this company acquired and held some real-world assets through purchases and business cooperation. How to revitalize and expand these assets? Their solution was to divide these assets into several parts and sell them on the internet in the form of NFT. In addition to promoting the value and attractiveness of the assets, they informed buyers that holding the NFT entitles them to the dividends of the corresponding offline assets. The idea was good, but unfortunately, due to the economic downturn, the appreciation of these real-world assets did not materialize, and the company's operations were not doing well. Early users who got on board early saw that the NFT prices in the market were about to collapse. Those who came with the idea of getting rich quickly were not happy. They accused the project of fraud and illegal fundraising. They wanted to unite and send the project party to prison, and then they organized and disciplined themselves to report the case to various places. The project party was in a panic, fearing that they would be arrested by the public security at any time.
To be honest, this is the visible reality of doing RWA in China. Many entrepreneurial newcomers with high education, recognition, and logical reasoning are easily injured in this cruel jungle. One important reason is that they mistakenly believe that others understand what they understand, not only the users but also the public security. In addition, they believe that by registering the company overseas and strictly adhering to the team's own moral bottom line, leaving the rest to the market, they can have a clear conscience and not worry about any risks. However, as an entrepreneur, you talk to users about Web3, metaverse, and decentralization, but the users only care about whether they can make money. If they make money with you, you are their leader or sweetheart, but if they accidentally become the bag holder in the market, you are the ruthless person in their eyes.
We have reason to believe that many friends who are doing RWA do have the initial intention of revitalizing assets to promote investment and benefit users, but the reality is that it is quite a slap in the face. How to ensure that one's RWA project can be free from contamination and how to reduce the legal risks of one's entrepreneurial project are what friends who are considering RWA need to consider, in addition to the operational risks in the market.
04. How to Prevent Legal Risks?
As an RWA entrepreneur, if your market expansion is targeting mainland China, then at least you need to pay special attention to the following three aspects:
（1）Ensure the Legality and Authenticity of Assets.
Whether or not to issue tokens, the first thing to do in business is not to deceive people. The premise of RWA tokenization is to ensure that the assets involved are legal and do not violate the country's laws and regulations. At the same time, it is also necessary to ensure that the assets involved are authentic and do not involve fraud or concealment. Whether you are anchoring large immovable properties such as houses or small commodities based on pure e-commerce logic, compliance with criminal law and consumer protection law must be observed. Therefore, it is essential to conduct due diligence and audits on the real-world assets anchored by digital tokens, sign purchase agreements with relevant parties to ensure the authenticity and after-sales service of the items. These are the most basic proofs of compliance.
（2）Exercise Caution in Token Qualification.
This is the most important aspect of compliance. When assets are tokenized and issued as tokens, whether they are NFTs or digital collectibles, the name is not important, but what is important is the nature of these tokens after RWA. Are they commodities, currency, securities, or something else? This will directly affect the qualification of the issuance behavior. China's regulatory attitude towards virtual currency is quite clear, that is, it prohibits any form of currency substitution issuance and circulation activities. Therefore, when entrepreneurs carry out RWA tokenization, they should avoid positioning the tokens as currency or substitutes. If RWA tokenization involves the issuance of equity, debt, fund shares, or other certificates that reflect investors' rights or claims, it may constitute securities. If RWA tokenization involves trading standardized contracts and stipulates the delivery of physical assets or cash settlement at a specific time in the future, it may constitute futures. These are all red lines in China's financial regulation. Please stay away from them.
（3）Guard Against High-Frequency Criminal Risks.
Two legal provisions that friends in the cryptocurrency circle should be familiar with and stay away from:
According to Article 176 of the Criminal Law, illegal fundraising refers to the act of raising funds from the public without approval and promising to pay interest or return the principal and interest in other ways, in violation of relevant national regulations.
According to Article 266 of the Criminal Law, fraud refers to the act of using fabricated facts or concealing the truth to deceive others for the purpose of illegal possession of their property.
Therefore, if RWA tokenization involves raising funds from the public without approval and promising to pay interest or return the principal and interest in other ways, or involves using fabricated facts or concealing the truth to deceive others for the purpose of illegal possession of their property, it may constitute illegal fundraising or fraud, and may be subject to corresponding criminal penalties. Therefore, if RWA tokenization involves false advertising of the value, returns, or risks of physical assets, or conceals the ownership, mortgage, or disputes of physical assets, thereby inducing others to purchase or invest in RWA tokens, the risk of illegal fundraising or fraud is very high.
05. Conclusion
RWA tokenization transforms real-world assets into digital tokens, which sounds like a great idea, but in practice, it is somewhat difficult to put into words. For friends in China who are engaged in blockchain RWA entrepreneurship, ensuring the legality and authenticity of assets is the foundation, understanding the nature of the tokens is the key, and guarding against criminal risks is the bottom line. In the final analysis, China's rules for virtual currency and blockchain are two big red lines: it does not recognize you as currency, only as a commodity; since it is a commodity, do not think about playing financial tricks. These rules are clear and direct, and as long as blockchain entrepreneurs do not cross the line, they can basically prosper safely.
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