Web3 Lawyer Unveiled: What type of RWA do people generally understand?

Source: Crypto Salad

Recently, discussions about RWA projects have been heating up across major Web3 communities. Industry observers online often claim that “RWA will reshape Hong Kong’s new financial ecosystem,” believing that, relying on Hong Kong’s existing regulatory framework, this sector will experience breakthrough development. During exchanges with colleagues, Crypto Salad has noticed ongoing debates about the so-called “compliance” issues, with varying understandings of “what is compliance,” leading to a situation where both sides feel their arguments are justified. This phenomenon stems from differing perceptions of the RWA concept.

Therefore, Crypto Salad finds it necessary to, from a professional legal team’s perspective, clarify what exactly the concept of RWA should entail and outline the compliance red lines for RWA.

1. How should the concept of RWA be defined?

(1) Background and advantages of RWA projects

Currently, RWA is becoming a hot topic in the market, gradually forming a new wave of development. This phenomenon is mainly driven by two major factors:

First, because tokenization’s advantages can compensate for the shortcomings of traditional financing.

Traditional financial markets have long faced high entry barriers, long fundraising cycles, slow capital raising, complex exit mechanisms, and other inherent issues. Token financing can bypass these flaws. Compared to traditional IPOs, RWA has several notable advantages:

1. Faster fundraising:
Since token circulation is based on blockchain technology and often occurs through decentralized intermediary trading platforms, it avoids restrictions such as foreign investment entry limits, industry policy constraints, and lock-up periods. It also compresses the review process that might take months or even years, greatly increasing the speed of fundraising.

2. Asset diversification:
Traditional IPOs typically support only equity issuance, requiring stable revenue, profitability, and asset-liability structures from issuers. RWA, however, can encompass a wider variety of non-standard assets, expanding the scope of financeable assets and shifting credit assessment focus to the underlying asset quality, thereby lowering the qualification thresholds for issuers.

3. Lower financing costs:
Traditional IPOs involve long-term cooperation with intermediaries like investment banks, auditors, and law firms, with total costs reaching hundreds of thousands or millions of dollars. RWA projects, by issuing tokens on decentralized exchanges and utilizing smart contracts, eliminate much of these intermediary costs and reduce manual labor expenses.

In summary, RWA has gained prominence due to its unique advantages, and the Web3 world and crypto circles particularly need real-world funding and projects. This has led to a wide range of applications—from large listed companies seeking substantive transformation to innovative startups exploring niche markets—actively exploring RWA’s potential.

Second, Hong Kong’s “compliance” has further fueled enthusiasm.

While RWA has been developing overseas for some time, the recent surge in Hong Kong is driven by regulatory innovations—after landmark projects, Hong Kong has provided compliant channels for domestic investors to participate in RWA. This “compliant” RWA implementation in China has attracted native crypto assets and prompted traditional projects and capital to pay attention to RWA’s investment value, pushing market enthusiasm to new heights.

But do users eager to try RWA really understand what it is? RWA projects vary widely in underlying assets and operational structures. Can everyone distinguish these differences? Therefore, we believe it’s necessary to define what constitutes compliant RWA through this article.

Most people think RWA involves tokenizing real-world assets via blockchain technology. However, when examining each project’s underlying assets and reverse-engineering its operation process, we find that their underlying logic can differ significantly. Based on systematic research, we summarize the understanding of RWA as follows:

We believe that RWA is a broad concept without a “standard answer.” Any process that tokenizes assets using blockchain technology can be called RWA.

2. What are the elements and characteristics of RWA projects?

A genuine RWA project should have the following features:

1. Underlying real-world assets

The key to whether the underlying assets are genuine and whether a transparent, third-party auditable off-chain asset verification mechanism can be established. For example, PAXG issues tokens backed by real-time gold reserves, with each token representing one ounce of physical gold stored in a third-party management platform, audited quarterly by a third-party firm, and redeemable for physical gold. Such transparent and regulated asset verification mechanisms help earn investor trust and provide a basis for effective valuation within the financial system.

2. Asset tokenization on the chain

Asset tokenization refers to converting real-world assets into digital tokens that can be issued, traded, and managed on the blockchain via smart contracts. The value flow and management of RWA are executed automatically through smart contracts. Unlike traditional finance relying on intermediaries for trading and settlement, RWA projects leverage blockchain’s transparency, efficiency, and programmability to significantly improve asset management efficiency and reduce operational risks.

Tokenization grants RWA key features like divisibility, tradability, and high liquidity. Assets can be split into small tokens, lowering investment thresholds and changing how assets are held and circulated, enabling retail investors to participate in previously high-threshold markets.

3. Digital assets with ownership value

Tokens issued by RWA projects should possess property attributes. The project must clearly distinguish between data assets and digital assets: data assets are collections of data owned by enterprises that can generate value, whereas digital assets are the value itself, not requiring re-pricing via data. For example, uploading a painting to the blockchain as an NFT makes it a digital asset because it can be owned and traded. In contrast, user feedback, browsing data, and click metrics related to that painting are data assets, which can be analyzed to understand user preferences and adjust pricing.

4. Legal compliance and regulatory oversight of issuance and circulation

The issuance and circulation of RWA tokens must operate within existing legal frameworks; otherwise, projects risk failure or legal issues. First, real-world assets must be genuine and legally owned, with clear, dispute-free ownership. Second, since RWA tokens often confer income rights or asset interests, they are likely classified as securities and must comply with local securities laws before issuance. Issuers should be qualified institutions—holding asset management or trust licenses—and implement KYC and AML procedures. Post-circulation, trading platforms need to be regulated, typically requiring licensed exchanges or compliant secondary markets, avoiding decentralized platforms. Continuous disclosure of asset information is necessary to ensure investors understand the underlying assets. Only under such regulatory frameworks can RWA tokens be issued and circulated legally and safely.

Additionally, RWA compliance involves cross-jurisdictional considerations, requiring a systematic framework covering asset rights confirmation, fund flows, regulatory permissions, and more. Throughout the entire lifecycle—asset on-chain, cross-chain, cross-border token circulation—RWA must establish mechanisms for asset rights, token issuance, fund transfer, profit distribution, user identification, and compliance auditing. This involves legal consulting, compliance design, and possibly third-party trust, custody, auditing, and regulatory tech solutions.

3. Types of RWA projects and their regulation

We observe that compliant RWA projects generally fall into two parallel categories:

1. Narrow sense: physical asset on-chain

This refers specifically to projects that tokenize verifiable real assets, such as real estate or gold-backed tokens, which is the most common understanding of RWA.

2. STO (Security Token Offering): financial asset on-chain

Apart from the narrow sense, many existing RWA projects are STOs.

(1) Definition of STO

Based on underlying assets, operational logic, and token functions, tokens can be broadly divided into utility tokens and security tokens. STOs involve tokenizing financial interests or certificates of real assets as security tokens on the blockchain.

(2) Definition of security tokens

Compared to utility tokens, security tokens are subject to securities regulations, representing on-chain financial products akin to electronic stocks.

(3) Regulation of security tokens

In jurisdictions like the US and Singapore, once tokens are recognized as securities, they are subject to traditional financial regulators (e.g., SEC). The design and trading of such tokens must comply with local securities laws.

From an economic perspective, the core purpose of financial products is to coordinate supply and demand between issuers and investors. From a legal and regulatory standpoint, some countries emphasize investor protection, while others prioritize facilitating financing and innovation. These differences influence specific rules, compliance requirements, and enforcement.

When designing and issuing RWA, one must consider the authenticity and legality of underlying assets, as well as product structure, issuance method, circulation channels, trading platforms, investor eligibility, and costs. If a project’s main appeal hinges on high leverage or high returns—such as promises of “hundredfold or thousandfold” gains—regulators may classify it as a security, leading to stricter oversight and higher operational risks.

Understanding the “securities regulation” concept and its underlying logic is crucial. Different jurisdictions have different definitions and focus areas. For example, the US, Singapore, and Hong Kong have clear standards for recognizing security tokens. Essentially, if a token meets the local criteria for securities, it will be regulated as such. The following summarizes relevant regulations in key regions:

A. Mainland China

The Securities Law defines securities as stocks, bonds, depositary receipts, and other tradable instruments recognized by the State Council, including government bonds and fund shares.

(Image from the Securities Law)

B. Singapore

The “Digital Token Issuance Guidelines” and “Securities and Futures Act” do not explicitly mention “security tokens,” but specify when tokens are considered “capital market products,” such as tokens representing shares or bonds.

(Image from the Guidelines)

C. Hong Kong

The Securities and Futures Ordinance (SFO) provides specific lists of securities and non-securities. It includes shares, equity interests, notes, bonds, and structured products, regardless of traditional or digital form. The SFC has clarified that tokenized securities are essentially traditional securities packaged as tokens.

(Images from the SFO and SFC notices)

D. US

The SEC applies the Howey Test to determine if a product is a security. If it meets the four criteria, it is regulated as a security. The four criteria are:

• Investment of money
• In a common enterprise
• With a reasonable expectation of profits
• Derived from efforts of others

The SEC’s “Framework for Digital Asset Investment Contract Analysis” emphasizes applying the Howey Test to digital assets. If a token is designed primarily for profit, depending on the efforts of others, and linked to real assets’ income, it is likely a security.

In essence, the core of securities regulation is about whether the token’s economic substance aligns with the legal definition of a security, not just its form.

4. What is the legal logic of layered compliance for RWA projects?

Having discussed the concepts and definitions, we return to the core question: which types of RWA can be considered truly “compliant,” and how can projects meet compliance requirements in practice?

We believe compliance means being under the supervision of local regulators and adhering to their rules. RWA compliance is a layered system:

First layer: Sandbox compliance
This refers to Hong Kong’s HKMA Ensemble sandbox, the narrowest and most regulatory pilot-oriented definition of compliance. It encourages financial institutions and tech firms to explore tokenization within controlled environments, supporting projects like the digital Hong Kong dollar (e-HKD).

HKMA’s efforts in exploring CBDC and stablecoins reflect a focus on monetary sovereignty. The sandbox offers policy space for experimental asset tokenization, facilitating the development of digital assets in payment, settlement, and financing. Projects in the sandbox are somewhat compliant and policy-approved, but remain in closed testing, with limited liquidity and market connection.

Second layer: Hong Kong’s regulatory compliance
Hong Kong, as an international financial hub, has been actively developing a regulatory framework for virtual assets, including tokenized securities. The SFC has established licensing regimes for Virtual Asset Service Providers (VASPs) and trading platforms, and is preparing further policies. Projects involving real assets are generally classified as securities and must be issued and traded under the securities regulatory framework, i.e., STO.

Third layer: Clear regulatory frameworks in crypto-friendly regions
In jurisdictions like the US, Singapore, and parts of Europe, comprehensive regulations exist for issuing, trading, and custody of digital assets mapped to real assets. Projects complying with licensing, disclosure, and asset regulation are considered compliant.

Fourth layer: “General compliance”
This refers to offshore jurisdictions with a “wait-and-see” approach, where authorities have not explicitly prohibited virtual assets. Projects operating within these legal gray areas are temporarily considered compliant, but this is uncertain and not a guarantee of legality.

In practice, most RWA projects struggle to meet the first two layers fully. Many rely on the third—leveraging crypto-friendly jurisdictions’ leniency—to reduce compliance costs. While many projects appear to be “landing” smoothly, their real market value depends on whether Hong Kong can develop a robust secondary market and cross-border capital flow mechanisms. Allowing global investors to participate in Chinese assets via RWA could be a breakthrough, similar to how Nasdaq became a gateway for global tech stocks.

Hong Kong’s role could be analogous to Nasdaq’s historical role in global tech markets. Once regulatory mechanisms and market infrastructure are mature, both Chinese and foreign investors will see Hong Kong as the primary platform for cross-border investment and asset “bottom-fishing.” This is not just a regional policy advantage but a new foundation for financial infrastructure and capital market restructuring.

In conclusion, RWA projects must operate within current policy boundaries, maintaining policy sensitivity and adjusting promptly to legal changes. During this exploratory phase, it’s highly recommended that all project teams proactively pursue “self-compliance.” Although this entails higher initial resource investment and costs, it significantly reduces legal, operational, and investor risks in the long run.

Among potential risks, fundraising risk is the most critical. If a project is deemed illegal fundraising, regardless of asset authenticity or technical sophistication, it faces severe legal consequences, threatening its survival and damaging reputation and assets. The definition of compliance varies across jurisdictions; developers should tailor compliance strategies based on their asset types, target markets, and local regulations. Only with controlled risks can RWA projects be steadily advanced.

4. Lawyer’s recommendations for RWA projects

As a summary, from a legal compliance perspective, we systematically outline key aspects that RWA projects should focus on throughout the entire process:

1. Choose jurisdictions with supportive policies
Prioritize regions with clear regulations, mature oversight, and openness to virtual assets to reduce compliance uncertainty.

2. Ensure underlying assets are genuine and redeemable
Regardless of technical complexity, the core of RWA is mapping real assets’ rights onto the chain. Authenticity, valuation, and enforceability of redemption are critical.

3. Gain investor recognition
The success of RWA depends on whether off-chain assets and rights are recognized by buyers or users. This involves legal clarity and rights transparency. Projects must also ensure investors are well-informed, avoiding overly complex structures or undisclosed risks, which could lead to trust issues or regulatory scrutiny.

4. Ensure institutional operations are compliant
All processes—fundraising, custody, valuation, taxation, cross-border compliance—must adhere to relevant laws. Proper licensing, reporting, and compliance procedures are essential.

5. Prevent post-launch compliance risks
Ongoing regulation changes require continuous monitoring. Establish professional compliance teams and maintain communication with regulators.

6. Manage reputation and market communication
Transparency and professionalism help build trust with the public and regulators, creating a favorable environment for sustainable development.

Conclusion

As the integration of virtual assets and real economy deepens, RWA projects vary widely in intent and mechanism—some are technological innovations, others financial experiments. Their capabilities and paths differ greatly, requiring careful classification and study.

Through extensive research and participation, we recognize that the biggest challenges are often not technical but regulatory—uncertainties in administrative and judicial practices. Developing “practical standards”—industry norms and compliance practices—remains valuable, even without formal legislation. As more participants, mature pathways, and regulatory experience emerge, systems will improve. Under the rule of law, fostering industry consensus and regulatory evolution is a positive, bottom-up process.

However, vigilance is essential: respecting existing legal and regulatory frameworks is fundamental to all innovation. Regardless of technological progress, laws are the bottom line safeguarding market order and public interests.

Disclaimer: The above reflects the personal opinions of the author and does not constitute legal advice.