Digital Asset Finance: A Historic Opportunity for Hong Kong

Hong Kong is moving towards the innovative frontier of digital asset finance. Since the release of the virtual asset policy declaration in October 2022, Hong Kong has become one of the world's most actively embracing international financial centers for Web3 and digital assets. From the government's clear commitment to the institutional support from regulatory agencies, Hong Kong is making significant strides into this new domain.

Tokenization of real-world assets ( RWA ) is at the core of Hong Kong's digital asset financial strategy. On August 28, 2024, the Hong Kong Monetary Authority launched the "Ensemble" sandbox program, focusing on the application of tokenized currencies in interbank settlements and conducting in-depth research on tokenized asset trading. This initiative underscores Hong Kong's determination to become a global center for RWA tokenization.

According to statistics, the current RWA market size exceeds $13 billion. More optimistic forecasts suggest that by 2030, the market value of tokenized assets could reach $10 trillion, indicating the potential for more than 75 times growth in the next 7 years.

This enormous growth potential has laid the market foundation for Hong Kong to build a global RWA tokenization hub. Notably, at the recent Hong Kong Fintech Week, a trading platform announced partnerships with several asset management companies to launch a tokenized fund project aimed at retail investors in Hong Kong under the Ensemble project framework, and to explore on-chain distribution of financial products.

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

The "Ensemble" project is an important strategy for Hong Kong to layout digital asset finance and consolidate its position as an international financial center. As early as March 2024, the Hong Kong Monetary Authority announced the project, clearly supporting the development of Hong Kong's tokenized market, with initial focus on tokenized deposits.

The project will further research and test tokenization use cases, including the settlement of tokenized real-world assets such as green bonds, voluntary emission reductions, aircraft, electric vehicle charging stations, electronic bills of lading, and treasury management. It is expected to evolve into a new financial market infrastructure in the future, connecting tokenized real-world assets with tokenized currencies.

The "Ensemble" project has established a compliance-oriented testing system in Hong Kong, providing opportunities for future digital asset innovation businesses to test the waters. This platform will help Hong Kong explore the deep integration of the digital asset financial ecosystem, providing momentum for it to become a global RWA tokenization hub.

RWA tokenization transforms physical assets into digital assets on the blockchain, offering significant advantages:

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

This makes RWA a major driving force for the incremental growth of on-chain digital assets, effectively connecting Web3 with the vast asset pools of traditional markets. Global bond market ( $133 trillion ) and gold market ( $13.5 trillion ) and other physical assets can enter the on-chain trading ecosystem through tokenization and generate returns through DeFi.

As of October 2024, the total locked value on the chain (TVL) has reached 88 billion USD. However, compared to the scale of tokenizable RWA assets, this number is still small. The tokenization of RWA will undoubtedly bring strong growth momentum to on-chain assets.

With the popularity of RWA tokenization, the on-chain world will usher in profound changes. The boundaries between traditional finance and digital finance will become increasingly blurred, and the on-chain asset system will not only expand significantly in scale but also achieve breakthroughs in compliance and transparency, providing global investors with more diversified options.

RWA Tokenization: Opportunities in Hong Kong's Digital Era

The demand for RWA tokenization in Hong Kong stems from its strong background as an international financial center. RWA tokenization provides a new opportunity for the integration of digital assets and traditional finance, allowing for the tokenization of funds, bonds, equities, and more through blockchain technology, thereby enhancing asset liquidity and accessibility.

As an international financial giant, Hong Kong has a rich variety of financial services, years of accumulated experience, a mature risk control system, a complete trading infrastructure, and a large customer base. These advantages help Hong Kong quickly put RWA assets on-chain, 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 up four major themes for the experimental testing of RWA tokenization: fixed income, investment funds, securitization, and trade financing. Among these, fixed income and investment funds are considered the primary experimental focus.

Taking the proof of concept of a tokenized fund product developed in collaboration with an asset management company on a trading platform as an example, this exploration is expected to promote the on-chain and transparency of fixed-income products, bringing innovation to the asset management field.

1. Compliance and Security: Relying on the regulatory testing platform to ensure that tokenized funds meet regulatory standards.
2. Improvement of liquidity and transparency: Tokenization enables fund products to be traded transparently on the blockchain, increasing liquidity.
3. Efficiency improvement and cost optimization: Simplifying traditional fund management processes, reducing intermediary costs, and attracting a broader range of retail investors.

This collaboration 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 forecasts, by 2026, institutions and high-net-worth investors are expected to allocate 5.6% and 8.6% of their portfolios to tokenized assets. This means that in the next three years, the incremental increase in allocations to RWA tokenized investments by institutions and high-net-worth investors will generally exceed 100%.

Retail Products: The Potential Trigger Point for RWA

In the past 5 years, the most successful financial product in the global digital asset space has been stablecoins. Stablecoins with RWA attributes, aimed at ordinary users, have become one of the widely accepted use cases for digital assets. The number of on-chain accounts for a certain version of USDT alone exceeds 40 million, greatly expanding the user base for Web3 and digital assets.

Many 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 asset management companies, has approached $1 billion, laying the foundation for the application of RWA tokenized products in the retail market.

Retail-type RWA tokenization products have the inclusive advantage of attracting more ordinary investors to participate. Through RWA tokenization, high-threshold assets in the traditional financial market can be divided into smaller trading units, significantly lowering the investment threshold.

More importantly, retail RWA products enhance risk control capabilities through the transparency features 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 dissemination.

A licensed virtual asset platform has played a key role in this process, fully aware of the strategic significance of retail RWA products for the Hong Kong digital asset ecosystem. The platform is actively committed to bringing tokenized assets into the mass market, leveraging its policy advantages as a compliant platform, expanding collaborations with traditional financial institutions, and providing clients with compliant RWA trading services.

In terms of business models, RWA covers multiple levels from underlying infrastructure to upper-layer DeFi. Certain platforms can provide underlying infrastructure services, responsible for tokenizing physical assets and custodially managing them on-chain; at the same time, they can also engage in intermediary layer services, bringing asset yields into the DeFi space to provide investors with more yield opportunities.

Conclusion

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

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 support its ability to introduce funds, stocks, gold, and other assets onto the blockchain in the form of RWA, completely releasing their liquidity. We have reason to anticipate the early realization of this vision.