How Are RWA Assets Tokenized in Hong Kong?

Key Takeaways

• As the RWA market grows rapidly, the focus is shifting towards a structure that allows for actual issuance and circulation at the scale of tokenization.
• In the model utilizing Hong Kong, an offshore issuer creates products based on assets, and licensed intermediaries in Hong Kong sell these to overseas professional investors. What investors purchase is not the underlying asset itself, but the product of the issuer.
• Even if products are sold, redemption is not guaranteed. The issuer must secure the rights to receive money from the assets and align the timing of recovery with the conditions for investor payments.
• Whether the same structure can handle the next asset after the first issuance is crucial for the business. Continuous asset supply and re-participation of investors are necessary for a repeatable market.

1. The Growing RWA Market That Needs No Further Explanation

According to RWA .xyz, the market size is expected to grow from approximately $1.5 billion in August 2023 to about $38.86 billion by September 13, 2026, marking an increase of about 26 times and maintaining a high growth rate. Numerous assets are being tokenized, and countries around the world are establishing regulations for tokenized assets.

Now, following growth, the question arises: how is tokenization possible?

2. Where to Tokenize?

The first question is where to tokenize. The number of places that have established tokenization regulations is increasing. However, regulations differ from country to country, and the pace also varies. The speed of business changes depending on where the same asset is issued.

In this regard, Hong Kong is undoubtedly ahead. Based on clear institutional standards, it continues to expand the scope of regulation and has the practical experience of issuing actual tokenized bonds such as government bonds, along with a rich global investor base.

In particular, Hong Kong provides clear guidelines for the entire tokenization process, including the SFC licensing system, VASP regulations, and technical safeguards. The clarity of regulations means business predictability for operators and assured protective measures for institutional investors. This is why Hong Kong is gaining attention as a global hub for RWA issuance and circulation.

So, how can assets from other countries reach overseas investors through Hong Kong? We will explore this through the case of South Korea among the countries seeking to promote tokenization in Hong Kong.

3. How Hong Kong Tokenizes Assets

The structure is divided into two areas. The left side represents the country where the assets are located, and the right side represents Hong Kong and BVI, which create and sell the products. Here, South Korea is placed on the left side.

The black arrows indicate the path of asset tokenization.

• South Korean Securities: Acts as a channel for purchasing underlying assets such as listed stocks, public and private funds, and notes.
• Note Issuer (SPV) established in BVI: Purchases and holds assets through a trust account of a South Korean securities firm in Hong Kong.
• Tokenization Platform: The SPV tokenizes the notes based on the corresponding assets.
• Sales Institutions: Licensed intermediaries, cryptocurrency exchanges, and authorized decentralized exchanges sell to overseas professional investors.

The orange arrows indicate the flow of money. When overseas professional investors subscribe with fiat currency or stablecoins, the funds flow through the licensed intermediaries into the SPV. The SPV converts stablecoins into fiat currency at a cryptocurrency exchange. This money then goes through the Hong Kong entity to the South Korean securities firm, which is used to purchase South Korean assets.

This is the 'dual engine model' proposed by Finloop, a financial technology company in Hong Kong. The left engine supplies the assets, and the right engine tokenizes those assets.

• First, the variability of the left side: South Korea only acts as a channel for self-purchase and subscription, while issuance, tokenization, sale, and trading are conducted in Hong Kong and BVI. It can be replaced by securities firms from other countries and Hong Kong entities, allowing Hong Kong to function as a distribution hub for multinational assets.
• Second, SPV-centered structure: All flows of asset purchase funds, subscription funds, and note issuance converge in the SPV. What investors purchase is not the South Korean assets themselves but the notes issued by the SPV, so the reliability of the SPV's asset holdings and profit distribution is key.
• Third, the intersection of blockchain and traditional financial networks: The SPV converts the investor's stablecoin subscription into fiat currency through a cryptocurrency exchange to purchase South Korean assets. Token movement occurs on the blockchain, while asset purchase and custody are conducted through existing financial networks.

Ultimately, the success of this structure depends on the connection point between the two engines. Now, let’s examine the sequence of asset acquisition, offshore issuance, and sales in Hong Kong.

3.1. What to Base the Product On

For the dual engine model to operate, the offshore issuer (SPV) must have a clear legal basis for receiving cash generated from the underlying assets. For example, whether the SPV can directly purchase and obtain ownership of government bonds and fund shares is crucial. In contrast, for assets based on future cash flows, such as export receivables or music royalties, it must be examined whether the cash receipt rights are legally transferred to the SPV or whether the asset holder is obligated to legitimately transfer the recovered funds to the SPV.

Ultimately, regardless of the type of underlying asset, clearly defining the legal basis and specific implementation path for the SPV to recover cash flows is key to commercialization.

3.2. What Products Does the Offshore Issuer Create?

This is because tokenization occurs around the SPV. Even if the underlying assets to be commercialized in South Korea are determined, a subject that can issue tokens and distribute profits is needed to circulate them to overseas investors.

In Finloop's dual engine model, a special purpose vehicle (SPV) established in the British Virgin Islands (BVI) plays a key role in connecting South Korean asset holders with overseas investors. The SPV directly issues tokenized notes or securities based on the rights to profits generated from South Korean assets. Therefore, what overseas investors purchase is not the South Korean government bonds or export receivables themselves, but the financial products issued by the SPV. Investors will receive profits and maturity redemption amounts from the SPV according to the contract terms.

For this structure to operate stably, the cash flows coming into the SPV and the schedule for payments to investors must be finely matched. It is essential to accurately identify the timing of actual cash inflows from the underlying assets, such as interest and principal repayments of government bonds, distribution or redemption amounts of funds, and settlement timings of export receivables and royalties. If the investor repayment date comes before the cash recovery, issues of repayment delays or liquidity shortages may arise.

Simply establishing a corporation overseas does not automatically transfer the cash flows of South Korean assets. It is necessary to clearly define in contracts what legal rights the SPV has over the underlying assets and who is responsible for recovering cash and transferring it to the SPV. The tokenization platform is responsible for transparently managing the total amount of issued products and the records of holdings and burnings.

Ultimately, the key to the offshore issuance stage is to seamlessly match the funds that the SPV actually recovers with the payment conditions promised to investors.

3.3. How Far Can It Be Distributed After Selling in Hong Kong?

Even if an offshore issuer creates a product, a financial company is needed to sell it to overseas investors. Finloop proposes a structure where a licensed intermediary in Hong Kong takes on this role. This is because it can review the product according to Hong Kong's securities regulations and sell it to professional investors while meeting overseas investors.

The intermediary examines the content and risks of the product issued by the SPV and verifies whether the investor can purchase it. If the product is sold only to professional investors, tokens cannot be transferred to anyone after issuance. New buyers must also be verified for eligibility, so the conditions for transferring tokens must reflect this. This is the method proposed by Finloop for private products, and it is not a condition that applies to all tokenized securities in Hong Kong.

Finloop also suggests a way to handle products sold in Hong Kong through intermediaries and trading markets in other regions. However, just because it was sold in Hong Kong does not mean it can be sold or traded in other countries. The regulations of each region must be checked. If an investor wants to resell before maturity, a method for determining the trading price and the buyer of the product is also necessary. There must be an institution that will accept it if it is to be used as collateral.

In this structure, Hong Kong plays the role of initially selling the product and verifying investor qualifications. Subsequent sales and trading in other regions, as well as collateral use, must be prepared separately.

4. Three Risks That Disrupt the Flow of Funds Between Korean Assets and Investors

Even if tokenized products are successfully sold in Hong Kong, if the cash generated from the underlying assets does not reach investors through the SPV (offshore issuer), the product will become impaired. The main risks that can occur during the fund execution process are as follows:

• Uncertainty in the Transfer and Recovery Path of Rights: Cash flow-based assets such as export receivables must have the buyer's account and the recipient clearly specified in the contract. If the obligation to receive and the settlement process are not legally binding, money may not enter the SPV even if it comes out of the asset.
• Time Lag Between Fund Inflow and Redemption Date: If the investor's maturity redemption date is earlier than the settlement date of the underlying asset, liquidity shortages and redemption delays may occur. If a Korean asset is issued as a dollar-based product, there is a risk that exchange rate fluctuations and currency conversion costs will impair returns.
• Bottlenecks in Overseas Remittance and Tax Procedures: Separately from the sales authorization of the Hong Kong intermediary, it must be verified whether the transfer of funds from the Korean asset holder to the offshore SPV and the overseas payment procedures operate smoothly.

Ultimately, the success of this model depends on whether the cash flow from Korean assets is delivered to overseas investors as promised through contracts and structures via the SPV without any issues.

5. The Second Issuance is More Important Than the First

Selling Korean assets in Hong Kong once is just the beginning. The first issuance takes a lot of time for asset review, contract signing, and determining the sales method. If this process has to be repeated for the next product, the pace of business will not pick up. Therefore, from the second issuance onwards, the structure of the first transaction should be reused.

Dollar-denominated export receivables are suitable assets to verify reusability. By applying the debtor evaluation criteria and product description methods established in the first transaction to the next bond, the design burden on the issuing organization and intermediary can be significantly reduced. However, having the same criteria does not mean that the risks of individual bonds are the same.

To achieve successful market penetration, the following changes must be checked:

• Reduction in the time required for asset review
• Re-participation of existing investors
• Continuous incentives for asset holders to supply products

As experience in issuing export receivables accumulates, it will be possible to expand the target to other types of Korean assets in the future. The success of the Korean-Hong Kong RWA model does not depend on the results of one-time issuances but rather on a virtuous cycle structure where asset supply, investor reinvestment, and continuous handling by intermediaries are interconnected.

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