Discussing the Real Possibility of RWA Landing in China from a Legal Perspective

Author: Xiao Sa Team

In 2023, with the ups and downs of the world’s macroeconomic situation and the gradual maturity of traditional virtual asset regulatory rules in various countries, the encryption world will be forced to continue to innovate on the basis of the original narrative, creating a more attractive and satisfying community and potential investors. products in demand. Real World Asset Tokenization (Real World Asset Tokenization, hereinafter referred to as “RWA”) came into being and has gradually become a new blue ocean and value capture channel in the current encryption market. Sister Sa’s team also wrote in previous articles (see “Real World Asset Tokenization” for details) Asset Tokenization" (RWA), Encrypted Narrative Inflection Point Arriving in 2024? ") has made some basic research and introduction to the concept of RWA, etc. Readers who are interested and who are in contact with RWA for the first time can read it by themselves.

So, is it possible for RWA to land in China? What are the specific channels under Chinese law, and what legal risks do Web3 Builder and related entrepreneurs have when they get involved in RWA? Today, Sister Sa’s team will have an in-depth chat with you on this topic.

Possibility Analysis of RWA Landing in China

Let me talk about a conclusive judgment first: Sister Sa’s team believes that the Token in RWA is only a carrier of value, and the value of RWA is determined by its underlying assets itself, and as a credible and convenient value circulation The tool has great practical value in many aspects such as asset management and investment portfolio diversification. Therefore, it has the possibility of landing and developing in China, but it must undergo appropriate compliance transformation. On the one hand, it is necessary to carefully choose the legal entity in terms of business entities; on the other hand, it is necessary to make careful choices in terms of tokenization technology and physical assets in order to adapt to China’s regulatory environment and achieve stable and long-term progress.

To be clear, RWA is a new concept, but not a new “idea”. Many years before the birth of blockchain technology, “real asset securitization” has become a widely used financial tool in the capital market. By analogy, RWA or fundamentalist RWA is essentially a financial tool developed based on blockchain technology, and the development of RWA-related businesses will inevitably be closely related to the existing financial system.

Based on the analysis of the technical characteristics and financial attributes of the aforementioned RWA, the Sister team must analyze the possibility of its implementation from the perspectives of my country’s existing blockchain and related derivative technology supervision, financial supervision, and criminal law on cybercrime and financial crime. To start, analyze the feasibility of its landing in China.

At the level of blockchain and related derivative technologies and financial supervision, the landing of RWA in China mainly has obstacles in the issuance and circulation of homogeneous tokens. On September 4, 2017, seven departments including the People’s Bank of China and the Central Cyberspace Affairs Commission jointly issued the “Announcement on Preventing Financing Risks of Token Issuance” (referred to as “9.4 Announcement”). 9.4 The announcement clearly pointed out that the so-called “virtual currency” token issuance and financing behavior (ICO) in which the financing entity raises funds from investors (including virtual currencies such as Bitcoin and Ethereum tokens) through the illegal sale and circulation of tokens is essentially The above is an “unapproved illegal public financing behavior”, which may be involved in illegal and criminal activities such as illegal sale of token coupons, illegal issuance of securities, illegal fundraising, financial fraud, and pyramid schemes. 9.4 After the notification, ICOs basically disappeared in mainland my country.

Subsequently, on September 24, 2021, ten ministries and commissions including the People’s Bank of China jointly issued the “Notice on Further Preventing and Dealing with the Risk of Hype in Virtual Currency Transactions” (“9.24 Notice” for short), clarifying that "virtual currency does not have legal The basic supervisory principle of “equal legal status of currency” and based on this, all related businesses of virtual currency are identified as “illegal financial activities” and banned. Residents in mainland China provide related virtual currency services.

However, Sister Sa’s team believes that the above regulations do not mean that the development of RAW has been blocked. On the basis of a deep understanding of regulatory ideas and specific rules, RWA still has the possibility of landing in China.

Choose Legal Entity Carefully

Looking at the current RWA projects, the following legal entities are mainly used for business development:

1. Special Purpose Vehicle (SPV)

SPV is not only a common means of asset securitization in the real world, but also a common legal entity operating RWA projects in the encrypted world. Essentially, an SPV is an independent company or entity dedicated to holding and managing specific assets. In traditional investment, financing, and M&A projects, the role of the SPV is usually risk isolation to protect the interests of investors and shareholders. In overseas RWA projects, many people have begun to learn from this idea to develop their business.

2. Limited Liability Company (LLC)

Sister Sa’s team also gave a detailed introduction to LLC when they interpreted the DAO bills of Wyoming and Utah in the United States (see DAO regulatory inflection point for details? The introduction of the US two state bills caused controversy), although LLC is called a “limited liability company” However, it is completely different from the limited liability company in our country. It is a more flexible commercial legal entity, similar to the combination of a company and a partnership enterprise. Currently, there is no LLC in our country’s law.

3. Limited

The Sa sister team believes that the traditional limited company structure can also be used to issue RWA. Clear shareholders and management can manage physical assets more efficiently and distribute income. However, due to the conflict between the multi-center concept of blockchain and the centralized management system of traditional companies, few people choose the limited company system to carry out RWA projects .

4. Partnership

As a highly personal legal entity, a partnership enterprise is more flexible than a company. In my country, there are many organizations that act as partnerships under the name of DAO, and it is also a relatively common one in my country at present. RWA organizational form.

5.DAO（Decentralized Autonomous Organization, DAO）

It should be noted that although the concept of DAO is very attractive, unlike other countries and jurisdictions such as the United States, my country has neither relevant legislation for DAO nor relevant business practices. The development of DAO in China is actually extremely limited, either it is not a partnership organization that is “selling dog meat”, or it is a loose community with the name of DAO but no real operation. As a conceptual legal entity that is still in the early stages of development, Sa Jie’s team believes that DAO itself is not enough to carry the heavy responsibility of RWA distribution and development in China.

Among the common RWA legal entity choices mentioned above, Sajie’s team believes that partnerships (including general partnerships and limited partnerships) and limited companies have a greater possibility of landing in China. On the one hand, the two legal entities have matured and have a full life cycle supporting system supply from establishment, supervision, bankruptcy, and liquidation; on the other hand, RWA itself is a new business, and the use of traditional legal entities to develop business is convenient for cooperation with regulatory agencies. Effective communication can reduce the “regulatory accident” caused by ignorance and mistrust between the two parties.

How should RWA choose physical assets in China? How to tokenize?

There is no doubt that if RWA wants to develop in China, it must abide by Chinese laws. Therefore, it must be cautious in choosing the path of physical assets and tokenization, and must not violate the red line.

1. Physical asset selection

In theory, all physical assets, even rights, financial products, etc. can be RWA, and even RWA itself can nest another RWA. As long as you are bold enough and thoughtful enough, RWA can realize all our imaginations about value circulation. Overseas It is on this basis that the RWA project has developed the asset category from traditional physical assets such as gold, real estate, and luxury cars to special valuable “things” such as bonds, private equity funds, and intellectual property.

However, my country’s national conditions are different from overseas countries after all. In order to prevent unnecessary legal risks, Sister Sa’s team believes that China’s RWA needs to avoid special assets that may affect my country’s financial security as much as possible.

First of all, it is necessary to avoid large assets with high value, such as real estate, vehicles, ships, precious metals, etc. On the one hand, the laws of our country have special regulations on the circulation of this type of assets. Not to mention that the idea of RWA may not be realized, and many breaches of contract and infringement disputes may be caused by RWA; on the other hand, large properties such as real estate are related to people’s livelihood. Improper operation is very likely to cause systemic financial risks, affect social stability, and easily touch the red line of criminal law.

Secondly, financial products need to be avoided, and private equity funds, stock securities, etc. should not be used for RWA. For a long time, my country has implemented high-intensity and penetrating supervision on the financial field. As a blockchain and financial derivative product, RWA itself should not show strong financial attributes in the early stages of development.

Sister Sa’s team believes that in the early stage of RWA’s development in my country, we can consider starting from low-value ordinary artworks (refer to NFT), ordinary commodities (such as light luxury goods, daily necessities), etc., and try our best to develop from the perspectives of cultural development and asset management. In order to avoid legal risks to the greatest extent.

2. Tokenization option

As mentioned above, my country has completely banned ICO and related virtual currency financial activities after the 9.4 announcement and the 9.24 announcement, but this does not mean that the development of RWA in my country is blocked. What is clear is that there are currently no laws and regulations in my country that prohibit the issuance and trading of NFTs, and it is not impossible to carry out RWA in the form of NFTs. Of course, Sister Sa’s team reminded that RWA in the form of NFT must also be separated from related hype, financialization and other operations, otherwise it is likely to be cracked down by regulators with “disguised token issuance”.

Write at the end

Looking at the development of RWA overseas, most of them are linked to financial products. The development of RWA in China must take a different path from overseas, and give RWA corresponding value (it can be cultural value or instrumental value). All in all, RWA is an entrepreneurial road full of thorns, and the wind and waves are as big as the fish. Only those who can correctly grasp the regulatory rules and basic ideas of supervision can successfully implement it in China.