(Yicai) Dec. 12 -- China’s recent ban on Real World Asset tokenization, a financing model that issues tokens or token-like rights and bonds backed by real-world assets, has brought Hong Kong’s RWA market to an abrupt standstill. Inquiries from mainland firms have plunged 90 percent over the past two months and most ongoing negotiations have been put on hold, several Hong Kong consulting firms said.

Seven major financial industry associations, including the Securities Association of China, issued a joint warning about illegal activities involving virtual currencies on Dec. 5. They said that RWA tokenization comes with multiple risks, such as fake assets, business failures and speculation. The notice requires all member institutions not to participate in virtual currency or RWA token issuance and trading activities in China. This is the first time that Chinese authorities have explicitly mentioned and defined RWA.

The share prices of companies linked to the RWA concept dropped on the news. The stock prices of IT services provider LongShine Technology Group and renewable energy firm GCL Energy have halved from their previous highs.

“This is an extremely strong signal,” said Liu Honglin, founder of Shanghai-based Mankun Law Firm. “RWA has been named as a major type of “illegal activity related to virtual currencies” alongside stablecoins, aircoins and crypto mining.

The notice covers the entire RWA industrial chain. The mainland-based staff of overseas virtual currency and RWA token service providers, as well as domestic institutions and individuals who knowingly help these token service providers conduct crypto-related business, will be held legally accountable.

The warning makes it clear that regulators are expanding their oversight from single project issuers to every service provider in the ecosystem, Liu said. All institutions and individuals providing project planning, technical outsourcing, marketing, Key Opinion Leader promotions or even payment interface services, will now fall under regulatory scrutiny.

The RWA concept had already been quietly gaining traction in Hong Kong for about a year before the seven associations issued their warning. More than 13 institutions have tried out RWA in the past two years, with underlying assets ranging from renewable energy equipment and financial products to agricultural commodities, according to incomplete statistics. Many mainland firms once saw RWA as a new way to raise funds and ease their financing pressures.

In fact, borrowing through RWA is not cheap. Launching an RWA project in Hong Kong typically costs at least HKD2.5 million (USD321,373), industry insiders said. Some institutions charge an underwriting fee of between 3 percent and 5 percent, although a few will waive it. Issuers also need to promise investors a certain rate of return on investment. Overall, the costs are quite high.

There are also regulatory blind spots. Insufficient oversight or transparency, could allow systemic risks to build up, Zhao Wei, a senior researcher at KX Research Institute, told Yicai.

For assets suitable for standardized and on-chain management, the quality of underlying assets, cash flow distribution and asset-pool composition should be put on-chain as much as possible and remain traceable to avoid turning into a “black-box.” At the same time, off-chain custody and independent audits are essential to ensure tokens are backed by real assets.

Surge in Fraud

What pushed regulators to act quickly may be the recent surge in fraud carried out under the guise of RWA.

Regulators in places such as Zhejiang, Shanxi and Dalian provinces have issued repeated warnings since the second half of this year about scammers luring the public into investing in so-called RWA projects.

Only assets with a steady cash flow and real value can serve as a basis for RWA, Fan Wenzhong, vice president of the Beijing Academy of Social Sciences, said at a recent meeting. Dressing up worthless assets as RWA will only create a new financial bubble. The public must be alert to so-called innovations that use technology as a disguise for Ponzi schemes.

Editor: Kim Taylor