Author: Zhang Feng

According to Reuters on Monday (September 22), citing two informed sources, the China Securities Regulatory Commission (CSRC) has recently issued "informal guidance" to some mainland brokerages, requesting them to suspend tokenization businesses related to Real World Assets (RWA) in Hong Kong. This move is interpreted as the latest signal of Beijing's cautious attitude towards the overseas digital asset boom.

The authenticity of this news cannot be confirmed at this time, but it has undoubtedly attracted widespread market attention. Assuming this news is true, we believe that what appears to be a shift in regulatory direction is, in fact, a re-recognition of the essence of RWA business. This "informal guidance" should not be simply interpreted as a suppression of innovation, but rather as a prudent statement from regulators regarding risk management in a complex international financial environment.

1. The Legal Gray Area of RWA Business

It is no secret that there are actual breakthroughs in the legal framework during the tokenization of physical assets.

In the asset confirmation stage, the process of converting physical assets into on-chain tokens involves issues of property law connection. China's property law system is based on physical assets, while the nature of tokenized assets is not clearly defined, creating potential risks for subsequent operations.

The value assessment stage also presents challenges. Traditional asset valuation methods struggle to adapt to the characteristics of 24/7 global trading post-tokenization, making it difficult to balance valuation frequency and accuracy.

There are numerous cross-border regulatory issues such as data, foreign exchange, and taxation. Cross-border data compliance issues are particularly prominent, as tokenized asset transactions inherently have cross-border attributes, while China's Cybersecurity Law and Data Security Law impose strict restrictions on the outbound flow of financial data, necessitating innovative solutions to resolve the conflicts between the two.

RWA business may bypass existing foreign exchange control measures, achieving the substantive cross-border flow of assets through tokenization, which creates tension with current capital project control policies. Cross-border tax issues are equally complex, as the lack of rules regarding tax jurisdiction and timing for cross-border transactions of digital assets may lead to tax losses.

Additionally, there is insufficient coordination in cross-border financial regulation. RWA business involves multiple jurisdictions, and the regulatory cooperation framework still focuses on traditional financial businesses, with regulatory collaboration for new digital asset businesses still in the exploratory stage. In this context, the cautious attitude of regulatory authorities is logically justified.

2. The Substance Behind the "Stop"

For the mainland, RWA business has always been in a relatively marginal legal area. China has yet to introduce specific laws and regulations governing the tokenization of digital assets, and existing operations are largely based on an expansive interpretation of current laws. Brokerages are essentially seeking survival space within the legal gaps by integrating the laws and regulations of both mainland and Hong Kong.

From a legal perspective, this "stop" does not have substantial implications, as there were originally no clear regulations promoting the development of RWA business in the mainland. The related businesses previously conducted by brokerages were influenced by earlier cases such as Langxin Technology. This "if not prohibited by law, it can be done" logic does not fully apply in the financial sector, as not every RWA business is similar to sandbox projects, especially those involving cross-border capital flows and systemic risks.

The regulatory authority's "informal guidance" should be understood more as a risk warning rather than a policy shift. It reminds market participants of the legal and policy risks that excessive innovation may bring in the absence of a clear regulatory framework. This warning helps prevent the market from forming erroneous expectations and avoids the introduction of "one-size-fits-all" regulation.

It is noteworthy that this guidance targets RWA business "in Hong Kong," indicating that regulatory concerns are no longer limited to domestic operations but are beginning to focus on the potential risk transmission of Chinese financial institutions' overseas activities. This expansion of cross-border regulatory vision aligns with China's policy orientation of balancing financial openness and risk prevention.

3. Moving Beyond the Misconception of "Regulatory Arbitrage"

During the development of RWA business, the market has gradually formed a misunderstanding of "regulatory acquiescence" or even "regulatory relaxation." Some practitioners believe that as long as it is technically feasible and there is market demand, the business can be conducted, and the regulatory attitude will gradually shift from tolerance to recognition. This misunderstanding stems from a one-sided understanding of the relationship between financial innovation and regulation.

The relationship between financial regulation and innovation has always been a dialectical unity. It is normal for regulation to lag behind innovation, but this does not mean that regulation will unconditionally recognize all innovations. The bottom line of regulation is to prevent systemic risks and maintain financial stability. Any innovation that may jeopardize this bottom line will ultimately be regulated.

This regulatory statement clarifies this misunderstanding, indicating that some "regulatory arbitrage" thinking that breaks the bottom line is unsustainable. For RWA business to develop healthily, compliance must be placed at the core from the very beginning, rather than being remedied afterward. This requires practitioners to consider not only technical feasibility and commercial value but also to fully assess compliance costs and regulatory attitudes.

In the future, the development of RWA business will emphasize "substance over form." Even if certain regulatory requirements are circumvented through technical means or cross-border arrangements, as long as the business essentially involves financial activities, it must accept corresponding regulation. This regulatory principle helps prevent regulatory arbitrage and promotes fair competition in the market.

4. Towards a Future of Compliant Development

The trend of digital tokenization is indeed inevitable. Blockchain technology creates significant space for enhancing asset liquidity, and major global financial markets are actively exploring related applications. However, the irreversible nature of technological trends does not mean that all technological applications are worthy of praise; the key is how to control risks while grasping the trend.

Adhering to a value-oriented approach is the premise for the healthy development of RWA business. Tokenization should serve to enhance the efficiency of the real economy, rather than create speculative tools. Project selection should prioritize high-quality assets that genuinely need tokenization to solve liquidity issues, avoiding the creation of trading markets for assets lacking actual value.

Legal and compliant operations are the foundation for the stable and long-term development of RWA business. This requires practitioners to actively communicate with regulators and participate in rule-making, rather than evading regulation. Compliance considerations should be introduced at the initial design stage of the business to ensure that the business model aligns with regulatory principles, rather than being remedied afterward.

Specifically, RWA business should focus on the following compliance priorities: first, customer suitability management, ensuring that only qualified investors participate in related transactions; second, transparent information disclosure, fully revealing asset risks and token structures to investors; third, risk isolation, preventing tokenization risks from transmitting to the traditional financial system; fourth, cross-border regulatory cooperation, actively cooperating with regulatory requirements from different jurisdictions.

Regulation and innovation have never been opposing forces but are instead a dynamic balance that promotes each other. The CSRC's "informal guidance" should not be simply interpreted as a denial of RWA business but as guidance for the healthy development direction of the industry. In the irreversible trend of asset digitization, only by placing risk prevention at the core of innovation can we realize the original intention of empowering finance with technology and avoid repeating the mistakes of past financial innovations spiraling out of control.

The prospects for RWA business remain broad, but the path may need continuous adjustment. Market participants should view this regulatory statement as an opportunity to clarify misunderstandings and return to rationality, jointly building a business model and regulatory framework that can leverage technological advantages while effectively controlling risks. Only in this way can the tokenization of physical assets truly become a beneficial exploration of financial innovation, rather than the next point of risk explosion.

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