Web3 Law Popularization丨China's Blockchain RWA Entrepreneurship Dilemma and Risks

Author: Lawyer Liu Honglin, Lawyer Liu Zhengyao

01, the industry is developing

China’s regulatory attitude towards virtual currencies is actually very clear:

• This thing is not a currency, at most it can only be a commodity; Since it is a commodity, it cannot have financial attributes and cannot be speculated. **

It can be said that grasping these two red lines can avoid 99% of the thunder for blockchain entrepreneurs in China.

But it’s cool to rub the edge and issue coins for a while, and it’s always cool to issue coins all the time. Therefore, there is an endless stream of friends who are worried about the issuance of tokens. And the banner is also with the development of the industry to keep pace with the times, the first few years may be the ICO, and the later ICO will not be allowed to do it, then STO, after the STO is cool, the new narrative is RWA.

RWA refers to the conversion of real world assets (RWA) into negotiable digital tokens through blockchain technology, so as to achieve decentralization, transparency and efficiency of assets. The advantages of RWA tokenization are that it can reduce transaction costs, improve asset liquidity, expand investor base, increase asset value, etc. Its application scenarios include real estate, finance, art and other fields.

By definition, RWA is a promising and lucrative thing. However, if the product does not follow the instruction manual after leaving the factory, it will be a bit troublesome.

0****2, **** project party is doing things

You may not believe it when you say it, but as far as you can see, the best thing to play in RWA in China is actually a friend who is engaged in NFT digital collection entrepreneurship, and it is not an exaggeration to say that RWA entrepreneurship V1.0 is not an exaggeration.

For example, if you buy an NFT digital collection issued by the project party, you will have the right to redeem a certain product/service; what if you don’t want to exchange or pick up the goods? You can wait for the appreciation of real assets and then transfer them to other friends who want them through the consignment market.

At the theoretical level, this narrative story is quite logical and good, there are more sales scenes for selling goods, and buyers have more reasons for friends to stock up and buy, especially those goods that may appreciate in value over time, such as tea and liquor.

Some friends may say that the number you are talking about is not RWA, but what I want to express is that the deformation does not change, and this is just a matter of different model parameters.

In such a model, a real asset with a stable price or slow growth, he may be a stable supply and demand relationship in the traditional market, and it is difficult to bring a leap in value because you tokenize it; 。

Therefore, in these two scenarios, the former is easy for the market not to buy because the investment income is too limited, and the latter is easy to be hurt because the financial attributes are too strong.

**0****3, **RWA Entrepreneurship Dilemma

Some time ago, Mankiw’s lawyer team received a case that can be said to be a living case. The general situation is like this, a company registered a company overseas, the company holds some real assets through purchase and business cooperation, how to revitalize the assets bigger and stronger? The solution they came up with is to divide these assets into several parts and sell them on the Internet in the form of NFT. In addition to advertising the asset’s low price and attractive value, and informing the buyer that holding the NFT, the income corresponding to the offline asset is your dividend. The idea is very good, but the economic downturn, the appreciation of the real assets not only did not materialize, the company is also a little poor management almost yellow, the early users who were on the bus saw that the price of NFT in the market was about to collapse, and the users who came to make a fortune at that time stopped doing it, saying that this was a fraud and that this was illegal fundraising. It is necessary to unite to send the project party in, and then there is an organized and disciplined way to report the case to various places. The friends of the project party panicked, for fear that they would be crushed by the public security one day.

To be honest, this is the reality of RWA in China that we can see with the naked eye, and many entrepreneurial newcomers with high education, high cognition, and reasonableness are easily injured physically and mentally in this cruel jungle. A very important reason is that others who mistakenly think that they understand also understand, not only the user can understand, but the public security also understands. In addition, I think that if you register the company overseas, strictly abide by the team’s own moral bottom line, and hand over the rest to the market, you can have a clear conscience and don’t worry about any risks, but as an entrepreneur, you talk to users about Web3, the metaverse, and decentralization, but the user only talks to you about whether he makes money or not, if he makes money with you, you are his leading brother or Britney, if he accidentally does a pick-up man in the market, then you are the cow lady in his eyes.

We have reason to believe that many friends who do RWA do have the original intention of revitalizing assets and promoting investment to benefit users, but the reality is such a slap in the face. How to make your RWA project clear the mud without staining, and how to make your entrepreneurial project involve legal risks lower. In addition to the market operation risks, all of you who are concerned about RWA should be considered.

**0****4、**How to prevent legal risks?

As an entrepreneur of RWA, if your market development is oriented to mainland China. Then we need to pay special attention to at least the following three aspects:

(1) Ensure the legitimacy and authenticity of assets. **

Regardless of whether you issue coins or not, you can’t deceive people when you come out to do business. The premise of RWA tokenization is to ensure that the assets involved are legal and do not violate the laws and regulations of the country. At the same time, it is important to ensure that the assets involved are genuine and that there is no fraud or concealment. Whether you anchor a large amount of real estate like a house, or a small commodity with pure e-commerce logic. There is a criminal law and a consumer protection law, which must be complied with, so it is necessary to conduct certain due diligence and audit for the real assets anchored by digital tokens, and sign a purchase agreement with relevant parties to ensure the quality and authenticity of the items and after-sales services, which are the most basic compliance workload proofs.

**(2) Characterization of the issuance of tokens with caution. **

This is a top priority for compliance. It is not important to issue assets on the chain as tokens, whether they are NFTs or digital collections, what matters is what is the nature of these digital tokens after RWA? Is it a commodity, currency, securities or other? This will directly affect the qualitative nature of the issuance. China’s regulatory attitude towards virtual currencies is relatively clear, that is, it prohibits any form of alternative currency issuance and circulation activities. Therefore, entrepreneurs should avoid positioning tokens as currencies or substitutes when carrying out RWA tokenization, if RWA tokenization involves the issuance of certificates such as equity, debt, fund shares, etc., which can reflect the rights of investors or claim rights, then it may constitute securities, and if RWA tokenization involves trading standardized contracts and agreeing to deliver physical assets or perform cash settlement at a specific time in the future, then it may constitute futures. These are clearly red lines for China’s financial regulation. Be sure to stay away.

**(3) Beware of high-frequency criminal risks. **

There are two laws that friends in the currency circle should be familiar with and stay away from:

• According to Article 176 of the Criminal Law, illegal fundraising refers to the act of raising funds from the public without approval in violation of relevant state regulations, and promising to pay interest or otherwise return the principal and interest.
• According to Article 266 of the Criminal Law, fraud refers to the act of using fictitious facts or methods to conceal the truth to defraud others of their property for the purpose of illegal possession.

Therefore, if RWA tokenization involves the act of raising funds from the public without approval in violation of relevant national regulations, and promising to pay interest or otherwise return the principal and interest, or involving the use of fictitious facts or methods to conceal the truth for the purpose of illegal possession to defraud others of their property, then it may constitute illegal fundraising or fraud, and thus be subject to corresponding criminal penalties. Therefore, if RWA tokenization involves falsely advertising the value, benefits or risks of physical assets, or concealing the ownership, mortgage or dispute of physical assets, thereby inducing others to buy or invest in RWA tokens, then the risk of illegal fundraising or fraud is extremely high.

05**、**Conclusion

RWA tokenization, which turns real-world assets into digital tokens, sounds like a beautiful idea, but in practice, it’s somewhat difficult to explain. For friends who are engaged in blockchain RWA entrepreneurship in China, ensuring the legitimacy and authenticity of assets is the foundation, figuring out the nature of the token is the key, and preventing criminal risks is the bottom line. In the final analysis, China’s rules for virtual currency and blockchain are two big red lines: don’t recognize you as a currency, only when you are a commodity, and since you are a commodity, don’t think about playing financial tricks. This rule is clear and direct, as long as blockchain entrepreneurs do not step on the line, they can basically get rich safely.