Digital Asset Finance: Hong Kong's Historic Opportunity

Since the official release of the virtual asset policy declaration at the end of October 2022, Hong Kong has become one of the regions most actively embracing Web3 and digital assets among global international financial centers. From the government's clear policy commitments to the institutional support from the Securities and Futures Commission and the Monetary Authority, Hong Kong is making significant strides towards the innovative frontier of digital asset finance.

In Hong Kong's digital asset financial strategy, the tokenization of real-world assets (RWA) is a key component. On August 28, 2024, the Hong Kong Monetary Authority officially launched the "Ensemble" sandbox program, aimed at leveraging experimental tokenized currencies to facilitate interbank settlements, while focusing on the study of tokenized asset trading. This marks Hong Kong's forward-looking layout in the field of tokenized assets and demonstrates its determination to become a global center for RWA tokenization.

According to the latest data from the RWA research platform, the total market size of RWA currently exceeds $13 billion. BlackRock's forecast is more optimistic, predicting that by 2030, the market value of tokenized assets will reach $10 trillion, which means the potential growth space in the next 7 years could be more than 75 times.

This tremendous growth potential lays the market foundation for Hong Kong to become a global RWA tokenization hub. Notably, during the recent Hong Kong Fintech Week, a platform announced its collaboration with Huaxia Fund to launch a tokenized fund project for retail investors in Hong Kong under the Ensemble project framework, and partnered with Franklin Templeton to conduct a proof of concept for on-chain wealth management products (including money market fund tokens) in the distribution chain.

"Ensemble" Project: Hong Kong's Digital Asset Financial Strategy

The "Ensemble" project is part of a far-reaching strategy for Hong Kong to lay out a digital asset finance framework and consolidate its status as an international financial center. In March 2024, the Hong Kong Monetary Authority officially announced the "Ensemble" project, clearly expressing support for the development of Hong Kong's tokenized market, initially focusing on tokenized deposits.

Subsequently, the "Ensemble" sandbox will further explore and test tokenization use cases, including the settlement of tokenized real-world assets (such as green bonds, voluntary emission reductions, airplanes, electric vehicle charging stations, electronic bills of lading, and treasury management), with the potential to develop into a new financial market infrastructure that connects tokenized real-world assets with tokenized currencies.

RWA tokenization transforms physical assets (such as bonds, gold, real estate, and other commodities) into digital assets on the blockchain, bringing unique advantages:

1. Improve cost-effectiveness: eliminate intermediaries, reduce transaction costs, and enhance efficiency.
2. Enhance accessibility: Allow smaller share divisions of traditional assets to improve accessibility and liquidity.

This means that RWA could become a major driving force for the growth of on-chain digital assets, effectively allowing Web3 to tap into the vast asset pools of traditional markets, such as the global bond market (USD 133 trillion) and the gold market (USD 13.5 trillion). Under a tokenization framework, these physical assets can not only enter the on-chain trading ecosystem but also generate DeFi yields through lending and staking, introducing real yield asset support into the digital asset market and enhancing its value base.

Since the DeFi boom in 2020, the scale of digital assets has grown significantly. As of October 25, 2024, the total value locked (TVL) on the chain reached 88 billion USD. However, compared to the trillions of USD scale of tokenizable RWA assets (such as bonds, gold, stocks, real estate, etc.), this number still seems small. Therefore, the tokenization of RWA will undoubtedly bring strong growth momentum to on-chain assets.

With the popularization of RWA tokenization, the on-chain world will undergo profound changes. The boundaries between traditional finance and digital finance will gradually blur, and the on-chain asset system will not only significantly expand in scale but also achieve breakthroughs in compliance and transparency, providing global investors with more diversified choices.

The significance of the "Ensemble" project lies in: through the establishment of a highly innovative testing platform, Hong Kong is conducting forward-looking exploration for the deep integration of the digital asset financial ecosystem. Its new products and new models will serve as a "rehearsal" for the next stage of digital asset innovation in Hong Kong, providing strong momentum for Hong Kong to become a global RWA tokenization hub.

RWA Tokenization: Opportunities in the Digital Asset Era in Hong Kong

The demand for RWA tokenization in Hong Kong stems from its deep financial cultural background as an international financial center. RWA tokenization provides new opportunities for the integration of digital assets and traditional finance, allowing funds, bonds, equity, and more to be tokenized through blockchain technology and digital asset forms, enhancing asset liquidity and accessibility.

At the same time, the vast mature asset targets and scale required by the RWA market are precisely the advantages of Hong Kong as an international financial giant. Hong Kong has a rich variety of financial services, years of accumulation and experience, a mature risk control system, a complete trading infrastructure, and a large customer base. These advantages can help Hong Kong quickly put RWA assets on the blockchain, providing the market with compliant and secure trading solutions, becoming a bridge between Web2 and Web3.

Under the "Ensemble" project framework, Hong Kong has set four key themes for the experimental testing of RWA tokenization: fixed income, investment funds, securitization, and trade financing, with fixed income and investment funds being regarded as the initial experimental focus of RWA tokenization.

Taking the collaboration between a certain platform and Franklin Templeton on the proof of concept for tokenized fund products in the Ensemble project as an example, this exploration is expected to promote the on-chain and transparency of fixed income products, bringing innovative changes to the asset management field.

1. Compliance and Security: Relying on the compliance testing platform of the Hong Kong Monetary Authority, ensure that tokenized funds meet regulatory standards, providing a safe and reliable investment channel for global investors.
2. Enhancement of Liquidity and Transparency: Tokenization allows fund products to be transparently traded on the blockchain, enabling assets to be fractionally divided, increasing liquidity, and providing investors with the advantages of liquidity and transparency in a decentralized market.
3. Efficiency improvement and cost optimization: Tokenization simplifies traditional fund management processes, reduces intermediary costs, makes fund products more inclusive, and attracts a wider group of retail investors.

This cooperation not only significantly enhances settlement speed and efficiency but also lowers the entry barrier by allowing small investments, bringing new sources of liquidity to the market, and is expected to further promote the development and popularization of the RWA market.

According to EY's forecast, by 2026, institutional and high-net-worth investors are expected to allocate 5.6% and 8.6% of their portfolios to tokenized assets. This means that over the next three years from this year, the incremental increase in the allocation of institutional and high-net-worth investors to RWA tokenized investments is generally expected to exceed 100%.

Retail Products: The Potential Trigger Point of RWA

In the past 5 years, the most successful financial products for digital assets globally have been stablecoins. Stablecoins with RWA attributes, aimed at the general public, have become one of the widely accepted use cases for digital assets. The on-chain account number of a certain version of stablecoins has exceeded 40 million, truly making blockchain no longer just a celebration for a few, greatly broadening and deepening the user base of Web3 and digital assets.

Major traditional financial institutions are also focusing on such products, aiming to further expand the application of digital assets in daily financial life. Currently, the scale of circulating tokenized government bond funds, led by certain tokenized government bond funds, has approached 1 billion USD, laying a solid foundation for the application of RWA tokenized products in the retail market.

Retail RWA tokenization products have the inclusive advantage of attracting more ordinary investors to participate: In the past, ordinary investors faced high capital thresholds and complicated trading processes when participating in traditional financial markets such as U.S. Treasury bonds, real estate, or high-end stocks. Now, through RWA tokenization, these assets can be divided into smaller trading units, significantly lowering the investment threshold.

Moreover, retail RWA products enhance risk control capabilities through the transparency of blockchain, bringing higher trust for investors and promoting the further application and popularization of digital assets in daily financial life. In the field of RWA tokenization in Hong Kong, a number of digital asset companies are promoting compliant RWA innovation and promotion.

Among them, a licensed virtual asset platform played a key role in this process, especially being well aware of the strategic significance of retail RWA products to the Hong Kong digital asset ecosystem. The platform is actively committed to bringing tokenized assets to the mass market, including leveraging its policy advantages as a compliant platform to expand partnerships with traditional financial institutions, providing customers with compliant RWA trading services.

The advantages of this platform include:

1. The first licensed platform in Hong Kong, with over six years of rich experience.
2. Collaborate extensively with top traditional financial institutions to jointly promote projects such as digital asset ETFs and tokenization of investment funds.
3. Strictly adhere to regulatory requirements to provide a compliant and secure cooperation environment for financial institution partners, while obtaining the largest insurance coverage in the world.
4. Obtain full licenses for providing tokenized projects, offering comprehensive solutions that cover the issuance of digital securities, custody, trading services, asset distribution, and blockchain technology services.

In terms of business models, RWA covers multiple levels, from underlying infrastructure to upper-level DeFi. The platform can provide underlying infrastructure services, responsible for tokenizing physical assets and custodial on-chain; at the same time, it can also engage in intermediary layer services, bringing asset yields into the DeFi space to provide investors with more opportunities for returns.

This layout not only helps Hong Kong strengthen the connection between Web3 and traditional finance, but also brings higher trust and a more convenient participation experience for investors through compliant asset management and risk control.

Conclusion

For the exploration of digital asset finance in Hong Kong, RWA tokenization is indeed an anticipated "paradigm shift". If a method can be found to legally combine on-chain digital assets with real-world assets, and if retail promotional attempts are made by certain platforms and funds, it cannot be ruled out that it will become the next "catalyst" for digital asset finance.

From this perspective, the role played by certain platforms also highlights Hong Kong's advantages in global digital asset financial innovation. As one of the oldest virtual asset companies in the world, these platforms possess deep expertise in digital assets, ensuring compliance and transparency for RWA tokenization projects. This is Hong Kong's unique natural advantage:

As an international financial center, Hong Kong has rich traditional financial resources, whether it is a mature risk control system, a complete trading infrastructure, or a large customer base, all of which support its ability to bring funds, stocks, gold, and other RWAs onto the blockchain in the form of RWA, completely unlocking their liquidity.

We have reason to look forward to the early realization of this vision.

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