Digital Asset Finance: A Historic Opportunity for Hong Kong

Since the official release of the virtual asset policy declaration at the end of October 2022, Hong Kong has become one of the most actively embracing jurisdictions for Web3 and digital assets among global international financial centers. From the government's clear policy commitments to the institutional support from regulatory agencies, Hong Kong is making significant strides towards the forefront of innovation in digital asset finance.

In this process, the tokenization of real-world assets ( RWA ) is a key component of Hong Kong's digital asset financial strategy. On August 28, 2024, the Hong Kong Monetary Authority officially launched the "Ensemble" sandbox program, aimed at promoting interbank settlement using experimental tokenized currency, with a focus on researching the trading of tokenized assets. This marks Hong Kong's forward-looking layout in the field of tokenized assets, demonstrating its determination to become a global center for RWA tokenization.

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

Such a huge incremental space lays the market foundation for Hong Kong to become a global RWA tokenization hub. It is worth noting that during the recent Hong Kong FinTech Week, a trading platform announced partnerships with several fund companies to launch a tokenized fund project aimed at retail investors in Hong Kong under the Ensemble project framework, and to conduct a proof of concept for on-chain wealth management products.

The Hong Kong Digital Asset Strategy Behind "Ensemble"

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

The sandbox program will further research and test tokenization use cases, including the settlement of tokenized real-world assets, involving areas such as green bonds, voluntary emission reductions, airplanes, electric vehicle charging stations, electronic bills of lading, and treasury management. This is expected to develop into a new financial market infrastructure that connects tokenized real-world assets with tokenized currency.

The "Ensemble" project has built a compliance-oriented testing system for Hong Kong, providing an opportunity to test future innovations in digital asset businesses. RWA tokenization converts physical assets into digital assets on the blockchain, bringing significant advantages:

1. Improve cost-effectiveness: Eliminate intermediaries, reduce trading costs, and enhance efficiency.
2. Enhance accessibility: Allow traditional assets to be fractionally divided to improve accessibility and liquidity.

This makes RWA a major driving force for the incremental digital assets on the chain, effectively connecting Web3 with the vast asset pools of traditional markets. Under the 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 support to the digital asset market and enhancing its value foundation.

As of October 2024, the total locked value on-chain (TVL) has reached 88 billion USD. However, compared to the trillions of dollars scale of tokenizable RWA assets (such as bonds, gold, stocks, real estate, etc.), this figure still appears insignificant. Therefore, the tokenization of RWA will undoubtedly bring strong incremental 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 become increasingly blurred. The on-chain asset system will not only expand significantly in scale but will also achieve breakthroughs in compliance and transparency, providing global investors with more diversified choices.

The "Ensemble" project is a forward-looking exploration for the deep integration of the digital asset financial ecosystem, and its innovative results will guide the next stage of digital asset innovation in Hong Kong, providing strong momentum for Hong Kong to become a global hub for RWA tokenization.

RWA Tokenization: Opportunities in the Digital Age of 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, equities, and more to be tokenized as digital assets 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 to quickly put RWA assets on-chain, providing the market with compliant and secure trading solutions, thus 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 finance, with fixed income and investment funds being regarded as the primary experimental focus.

Taking the collaboration between a trading platform and a fund company for the proof of concept of 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 Monetary Authority to ensure that tokenized funds meet regulatory standards, providing a safe and reliable investment channel for global investors.
2. Improved Liquidity and Transparency: Tokenization enables fund products to be traded transparently on the blockchain, allowing assets to be fractionally divided, increasing liquidity and providing investors with the advantages of 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 broader retail investor base.

This cooperation can not only significantly enhance settlement speed and efficiency but also lowers the entry threshold 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, institutional and high-net-worth investors are expected to allocate 5.6% and 8.6% of their portfolios to tokenized assets, indicating that the incremental increase in allocation to RWA tokenized investments will generally exceed 100% within the next three years.

Retail Products: The Potential Trigger Point of RWA

In the past 5 years, the most successful digital asset financial product globally has been stablecoins. As a product with RWA attributes aimed at ordinary users, stablecoins have become one of the widely accepted use cases for digital assets. The number of on-chain accounts for a certain version of USDT has exceeded 40 million, greatly expanding the user base of 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 the tokenized government bond fund led by certain institutions has reached nearly $1 billion, 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: through RWA tokenization, assets such as U.S. Treasury bonds, real estate, or high-end stocks 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 transparent nature of blockchain, providing investors with higher levels of trust and promoting further application and popularization of digital assets in daily financial life. In the field of RWA tokenization in Hong Kong, a group of digital asset companies is driving compliance innovation and promotion of RWA.

Certain licensed virtual asset platforms have played a key role in this process, well aware of the strategic significance of retail RWA products to the digital asset ecosystem in Hong Kong. Therefore, they are actively committed to bringing tokenized assets to the mass market, including leveraging their policy advantages as a compliant platform to expand partnerships with traditional financial institutions and provide customers with compliant RWA trading services.

The advantages of these platforms include:

1. Rich industry experience
2. Extensive collaboration with top traditional financial institutions
3. Strict compliance guarantees and insurance coverage
4. Comprehensive product line and service licenses

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

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, the tokenization of RWA is an anticipated "paradigm shift". If a method can be found to legally combine on-chain digital assets with real-world assets and promote it in a retail format, it cannot be ruled out that it may become the next "catalyst" for digital asset finance.

Hong Kong has unique advantages in global digital asset financial innovation. As an international financial center, Hong Kong possesses abundant traditional financial resources, including a mature risk control system, a complete trading infrastructure, and a large customer base. These advantages support Hong Kong in bringing assets such as funds, stocks, and gold onto the blockchain in the form of RWA, unlocking their liquidity potential.

We have reason to expect that Hong Kong's innovative achievements in the digital asset financial sector will be realized soon, bringing new possibilities to the global financial market.