According to Reuters on Monday (September 22), citing two sources familiar with the matter, the China Securities Regulatory Commission (CSRC) recently issued "informal guidance" to some mainland securities firms, requesting that they temporarily suspend tokenization of real world assets (RWAs) in Hong Kong. This move is being interpreted as the latest signal of Beijing's cautious approach to the overseas digital asset boom. While the authenticity of this news cannot be confirmed at this time, it has undoubtedly garnered widespread market attention. Assuming this news is true, we believe that while it may appear to be a shift in regulatory direction, it actually represents a re-evaluation of the nature of the RWA business. This "informal guidance" should not be simply interpreted as a stifling of innovation, but rather as a cautious expression of regulatory risk management in the complex international financial environment. 1. Legal Gray Areas in RWA Business The legal gray areas surrounding the tokenization of physical assets are no secret. The asset title confirmation process, converting physical assets into on-chain tokens, raises questions about the legal connection between property rights and legal systems. my country's property law system is based on physical assets, but the nature of tokenized assets remains unclear. This ambiguity poses risks for subsequent operations. Valuation also presents challenges. Traditional asset valuation methods struggle to adapt to the 24/7 global nature of tokenized transactions, and striking a balance between valuation frequency and accuracy is difficult. Cross-border regulatory issues such as data, foreign exchange, and taxation present numerous challenges. Cross-border data compliance is particularly prominent. Tokenized asset transactions are inherently cross-border, while my country's Cybersecurity Law and Data Security Law impose strict restrictions on the export of financial data. This conflict requires innovative solutions. RWA businesses may circumvent existing foreign exchange controls and enable the de facto cross-border flow of assets through tokenization, which creates tension with current capital account control policies. Cross-border taxation is equally complex. A lack of rules regarding tax jurisdiction and the timing of taxation for cross-border digital asset transactions may lead to tax revenue loss. Furthermore, cross-border financial regulatory coordination mechanisms are insufficient. RWA business involves multiple jurisdictions, while regulatory cooperation frameworks are still focused on traditional financial businesses. Regulatory coordination for new digital asset businesses is still in the exploratory stage. Against this backdrop, the regulators' cautious approach is logical and reasonable. II. The Reality Behind the "Stop" In mainland China, RWA business has always existed in a relatively marginal legal area. my country has yet to enact laws and regulations specifically regulating the tokenization of digital assets, and existing practices are often based on expansive interpretations of existing laws. By blending mainland and Hong Kong laws and regulations, securities firms are essentially seeking a niche within the legal landscape. From a legal perspective, this "halt" has no substantive implications, as mainland China lacks clear regulations promoting RWA business. Securities firms previously conducted such business based on the exemplary impact of previous cases like Langxin Technology. This "anything is allowed unless prohibited by law" logic doesn't fully apply in the financial sector, as not every RWA business resembles a sandbox project, especially those involving cross-border capital flows and systemic risks. The regulators' "informal guidance" should be understood as a risk warning rather than a policy shift. It alerts market participants to the legal and policy risks associated with excessive innovation in the absence of a clear regulatory framework. This warning helps prevent the formation of false market expectations and avoids the introduction of "one-size-fits-all" regulations. Notably, this guidance targets RWA business conducted in Hong Kong, indicating that regulatory attention is expanding beyond domestic operations and focusing on potential risk transmission from overseas activities of Chinese financial institutions. This expansion of cross-border regulatory coverage aligns with my country's policy of prioritizing both financial opening and risk prevention. Third, Overcoming the Misconception of "Regulatory Arbitrage" As RWA business has developed, the market has gradually developed a misconception of "regulatory acquiescence" or even "regulatory deregulation." Some practitioners believe that as long as the business is technically feasible and there is market demand, it can proceed, and that regulatory attitudes will gradually shift from tolerance to approval. This misunderstanding stems from a one-sided understanding of the relationship between financial innovation and regulation. Financial regulation and innovation have always been dialectically unified. It's normal for regulation to lag behind innovation, but this doesn't mean regulators will unconditionally endorse all innovation. The bottom line of regulation is to prevent systemic risk and maintain financial stability. Any innovation that threatens this bottom line will ultimately be regulated. This regulatory statement clarifies this misunderstanding and demonstrates that some "regulatory arbitrage" strategies that push the boundaries are unsustainable. For the healthy development of the RWA business, compliance must be placed at the core from the outset, not as an afterthought. This requires practitioners to consider not only technical feasibility and commercial value, but also to fully assess compliance costs and regulatory attitudes. Future development of the RWA business will place even greater emphasis on "substance over form." Even if certain regulatory requirements are circumvented through technical means or cross-border arrangements, as long as the business substantively involves financial activities, it must be subject to corresponding regulation. This regulatory principle helps prevent regulatory arbitrage and promote fair market competition. IV. Toward a Future of Compliance Development The trend toward digital tokenization is indeed inevitable. Blockchain technology has created enormous potential for increasing asset liquidity, and major financial markets around the world are actively exploring related applications. However, the irreversibility of technological trends does not mean that all technological applications are worthy of promotion. The key lies in how to grasp these trends while controlling risks. Adhering to a value-oriented approach is a prerequisite for the healthy development of the RWA business. Tokenization should serve to improve the efficiency of the real economy, rather than creating a tool for speculation. When selecting projects, priority should be given to high-quality assets that truly require tokenization to address liquidity issues, avoiding the creation of trading markets for assets lacking real value. Legal and compliant operations are the foundation for the sustainable development of the RWA business. This requires practitioners to proactively engage with regulators and actively participate in rulemaking, rather than evade regulation. Compliance considerations should be incorporated into business design from the early stages to ensure that the business model aligns with regulatory principles, rather than resorting to after-the-fact measures. Specifically, RWA businesses should focus on the following compliance priorities: First, client suitability management to ensure only qualified investors participate in transactions; second, transparent information disclosure to fully disclose asset risks and token structures to investors; third, risk isolation to prevent the transmission of tokenization risks to the traditional financial system; and fourth, cross-border regulatory collaboration to proactively comply with regulatory requirements in different jurisdictions. Regulation and innovation have never been in opposition, but rather a mutually reinforcing dynamic balance. The CSRC's "informal guidance" should not be simply interpreted as a rejection of the RWA business, but rather as guidance for the healthy development of the industry. Amid the irreversible trend of asset digitization, only by placing risk prevention and control at the core of innovation can we realize the original aspiration of technology-enabled finance and avoid repeating the mistakes of past financial innovations that ran wild. The prospects for the RWA business remain broad, but the path may require constant adjustment. Market participants should view this regulatory statement as an opportunity to clarify misunderstandings and return to rationality, jointly building a business model and regulatory framework that both leverages technological advantages and effectively controls risks. Only in this way can the tokenization of physical assets truly become a beneficial exploration of financial innovation, rather than the next risk flashpoint.
Hui Xin
Alex
Kikyo