Launching RWA and tokenization products for fund raising in fintech and crypto companies

RWA refers to the tokenization of real world assets by bringing them on-chain for trading through blockchain technology. It enables the issuer to raise funds in the blockchain world with reference to assets in the real world. It enables investors to trade real world assets on-chain without a traditional securities account.

Note: Simplified diagram for illustrative purposes

The MicroStrategy (MSTRON) token

The MicroStrategy (MSTRON) token is one of the most successful RWA projects launched. Strategy Inc (formerly known as MicroStrategy) is Nasdaq-listed and the world’s first and largest Bitcoin (BTC) treasury company. Its business strategy is to acquire BTC through its proceeds from equity and debt financings, as well as cash flows from its operations. While it treats BTC as long term holdings and expects to continue to accumulate BTC, it may also sell BTC for general corporate purposes or for other reasons. The share price of Strategy is closely associated with the price movement of BTC. MSTR has become a popular US-listed stock for investors seeking exposure to BTC without holding BTC directly.

Strategy successfully launched the MSTRON token through Ondo Finance, a blockchain technology company. The MSTRON token is 1:1 backed by Strategy shares held by a third party regulated custodian. This is an example of RWA issuance where real world assets are being tokenized and brought on-chain for trading through blockchain technology. The token can be traded 24/7 by investors through their crypto wallet without the need for a traditional brokerage account. This bridges the gap between traditional financial markets and decentralized finance (DeFi).

Benefits of RWA

There are various benefits of a RWA:

Additional means of fund raising for company founders seeking capital, especially for those in the blockchain and crypto space where access to traditional investors may be limited

Trading 24/7 on a blockchain without going through a traditional broker

Fractionalization of assets allowing investors to diversify their portfolio and invest in assets they would otherwise not be able to

Creating new tokenized products for trading

Creating a new ecosystem where stablecoin may be the main currency

Launching RWA and tokenized offering in Hong Kong

There are fintech platforms in Hong Kong that provide the technology and infrastructure of a RWA, such as AlloyX and Asseto. These platforms often partner with licenced crypto exchanges such as HashKey and licenced securities firms to allow tokenized products to be made available to exchange users. As more assets are made available on-chain, investors can start investing with their stablecoins.

A licenced custodian service provider may be used to hold the assets. There is currently a proposed legislation to require all virtual asset custodian service provider to be licenced by the SFC. This replaces the TCSP licence which is traditionally used for holding client assets on trust. Where the assets to be held are virtual assets then a new licence known as the virtual asset custodian service provider licence will need to be obtained from the SFC.

There is also a trend in fintech and crypto related Hong Kong listed companies to issue debt security token. This type of token allows the holder to earn an interest which may be linked to the cash flow or price fluctuation of certain underlying assets. This operates like a bond where there is a coupon rate and a maturity date. These products are classified as securities and the securities laws under the SFO in Hong Kong will apply.

In 2023, the Hong Kong Monetary Authority (HKMA) launched a HK$800 million tokenized green bond offering, being the first tokenized green bond issued by a government. The full cycle of a bond offering is digitalized and performed on a blockchain network, which includes primary issuance, coupon payment, settlement of secondary trading and maturity redemption.

RWA legal and regulatory issues

From a legal and regulatory perspective, the key question is how the securities laws in Hong Kong apply to a securities token offering (STO). The issuer should consult with its lawyers to advise on (i) whether the tokens are securities under the SFO and (ii) whether any disclosure requirements apply. A token offering could be structured in a way such that the safe harbours under the public offering regime would apply (e.g., if the product is being sold to professional investors (PI) only). This often require advance planning.

Stablecoin Ordinance and the HKD stablecoin

As Hong Kong is rolling out its stablecoin regime, it is expected that the HKD stablecoin will play an important role in a lot of the tokenized products offered on licenced VATP in Hong Kong, such as OSL, HashKey and EXIO. Currently, there are only three stablecoin participants in Hong Kong, including Jingdong Coinlink, RD Innotech and Standard Chartered. The number of stablecoin issuers is not expected to increase significantly, given the stringent requirements that need to be met to become a stablecoin issuer. As required by the HKMA, an issuer is required to demonstrate genuine interest in developing a stablecoin issuance business in Hong Kong with a reasonable business plan. It is expected that the stablecoin regime will bring out new tokenized products linked to the HKD stablecoin.

Utility tokens, meme coins and NFTs as fund raising

Utility tokens have always been used by crypto founders to raise capital. They are typically structured in a way such that they do not fall under the securities category. They do not represent ownership in or are not tied to real world assets. There is a trend in crypto founders setting up foundation companies to issue utility tokens in return for investor’s money, which could be in fiat or stablecoin. This type of capital raise generally takes place in the form of a SAFT. The founders get their funding while investors get utility tokens which may include a vesting schedule and certain lockup restrictions. Legal opinion is often sought to confirm whether this type of arrangement falls in scope of the securities laws of the jurisdictions concerned.

Meme coins (which started as jokes or viral trends) and NFTs (non-fungible tokens) have also emerged as novel fundraising mechanisms that capitalize on social and digital art trends. These products, however, could be quite a hit or miss!