Written by: Liu Honglin, Mankiw LLP
On October 27, Mankiw LLP, together with innovative companies such as BlockbeatHK, HKVAX, Hashkey Group, Stephenson Harwood, Jiuzhou Digital Technology, Huisu Co., Ltd. (Hong Kong), and RWA.Ltd, held an offline salon event at Hong Kong Cyberport. The theme of the event revolved around cross-border payments and RWA.
At the roundtable sharing session, Attorney Honglin and the guests had a lively discussion on the relevant compliance points of RWA. The sparks of thought sparked by this exchange made Attorney Honglin feel that he had not yet finished discussing it, so he compiled it into this article to share with friends who are interested in this hot topic.
Lawyer Honglin’s core point of view is that the current lively discussions and attempts on RWA in the market seem to have gone astray.
Why does Lawyer Honglin feel this way? There are mainly the following reasons.
First of all, the current RWA is entirely a game between mainstream institutions, securities firms, asset management companies and even exchanges, and it really has nothing to do with ordinary Internet users.
We all know that the real value of blockchain lies in its ability to significantly reduce transaction costs and thus achieve network democratization, which is the original intention of the birth of blockchain. However, the current actual situation is not satisfactory. The vast majority of RWA projects still follow the traditional path, that is, institutions issue assets, then brokers distribute them (even if sales have been completed in advance), and finally qualified investors purchase them. On this basis, only the software services or chain operations of token issuance are added. In this process, traditional compliance work has not been reduced at all, and even new tasks such as system development have been added.
In this way, for the entire transaction structure, does it really reduce the financing costs of traditional capital demanders or entrepreneurs? Does it really improve their financing efficiency? The answer is obviously questionable.
It is not difficult to find that the so-called RWA cases on the market are actually adding token issuance after the transaction is completed. In addition to increasing more legal fees and technical development costs, it does not seem to reduce the transaction costs of all parties and the original intention of reducing costs and increasing efficiency. Although there is further joy, it makes people feel that it is not impossible not to do it. The RWA event that is very popular in the news is essentially a marketing-driven PR event, which is far from the original intention of blockchain to reduce the transaction costs of all parties and share network value.
Furthermore, at present, everyone is carrying out the compliance work of RWA, which is in a state of "enduring hardship without any difficulty" and "creating difficulties even if there are no difficulties".
They are all working on RWA compliance, but when it comes to implementation, it doesn’t seem to be that RWA. Currently, the so-called RWA does not have many innovative breakthroughs in terms of compliance. If we look at the projects packaged as RWA from a disenchanted perspective, their compliance points are still focused on compliance in traditional asset securitization, asset management or private equity fund sales, as well as compliance in traditional tokens.
At this stage, it is more of a discussion about the compliance of traditional bond issuance or asset securitization than a discussion about the compliance of RWA. The only change may be the addition of token issuance, which itself is a neutral technology. The key to its compliance lies in whether the underlying token is a security, a functional token (i.e., a commodity), or other forms of existence (such as electronic currency). Accordingly, whether in the EU, the United States, or in mainland China and Hong Kong, the issue of compliance and supervision of the rights and interests anchored or represented by the token itself has been discussed for seven or eight years.
In addition, the existing RWA project is not Web3 at all. It has not solved the network hegemony problem brought about by the centralization of the traditional Web2 era, nor has it achieved the network democratization of Web3.0.
In our ideal scenario, the existence of blockchain is to enable network participants to realize the true record of all data and make it unalterable, while providing incentives and rewards to the entire network participants. However, in the existing RWA model, the token is more of a certificate for qualified investors to hold a certain share of equity. From the perspective of traditional centralization, this certificate may be the registration content on the contract or a string of numbers in the securities account. How different is it from traditional centralization when it is placed on the blockchain network?
Traditionally, people record daily data on centralized servers, but now they just present it on decentralized servers. From this perspective, it seems to be an improvement, but it is not big. Of course, we do not deny the attempt of the existing model, but we think that this attempt has limited value in terms of industry advancement and exploration of the blockchain track.
So, where is the future direction of the RWA track? Lawyer Honglin naturally doesn’t know, but I always feel that RWA should not deviate too much from the topic and should comply with the two spirits of Web3.
First, RWA’s attempts should return more to participation in decentralized networks rather than through traditional central institutions.
Second, it enables different network nodes or participants to share the network value , rather than being limited to traditional private equity funds or qualified investors.
Perhaps, an important direction of RWA is the combination with DePIN . In this scenario, users, as the sales end of the product, are themselves consumers of the product. At the same time, due to the user's consumption habits or contributions to the network, certain incentives can be given through tokens. This in turn will further promote the marketing and promotion of the entire product or project and the spread of the network, and will grow exponentially. In addition, through an unalterable method, network data can be presented truthfully.
In this way, the project operators and investors can also obtain real data operation status and benefit from project participation. In this scenario, investors may be early angel users, and these angel users may also become the main promoters of the project. In this way, the RWA project may be able to share the user's consumption, project promotion and long-term value-added from the perspective of consumers. Returning to the original intention of blockchain, making RWA closer to the public and realizing value sharing among network participants, RWA may be able to shine more brilliantly.
This article is only Lawyer Honglin’s personal thoughts and opinions on RWA. It may not be so mature, but it is also a starting point. We hope that more knowledgeable people can join in the exploration and discussion of RWA and jointly promote the development of blockchain technology and financial innovation.
