In the digital financial era, traditional corporate financing models, particularly equity financing through public stock issuance and asset securitization financing through REITs, are facing significant challenges from the emerging model of real-world asset tokenization (RWA tokenization). Recently, the RWA tokenization trend has surged both domestically and internationally, becoming a hot topic of discussion. This has both brought about promising prospects for fintech innovation and created new risks. 1. RWA Tokenization Is a Major Trend Replacing Traditional Corporate Financing Models RWA tokenization is the process of converting ownership or income rights of real-world assets into digital tokens issued on the blockchain. Its rise is no accident; it stems from its comprehensive advantages over traditional financing methods in terms of financing efficiency, cost, and asset accessibility. First, through smart contracts, RWA tokenization automates the issuance, trading, and clearing processes, significantly shortening the financing cycle. Trading can be conducted 24/7, with settlement being nearly instantaneous (T+0), significantly improving capital turnover efficiency. Second, by reducing reliance on traditional intermediaries like investment banks, the RWA tokenization issuance process is extremely streamlined, and the automated execution of smart contracts reduces ongoing management and compliance costs. Furthermore, asset tokenization separates ownership and income rights, significantly lowering the investment threshold. Theoretically, any financing activity is a redistribution of socioeconomic resources across space and time. The advantages of RWA tokenization exemplify the Coase Theorem, proposed by Nobel Prize-winning economist Ronald Coase. This theory states that when transaction costs are zero or sufficiently low, regardless of how initial property rights are defined, the market will ultimately achieve a rational allocation of resources (Pareto optimality) through negotiation and transaction. High intermediary fees, information search costs, and contract execution costs in traditional financial markets are precisely the "transaction costs" that hinder the efficient allocation of resources. Leveraging the power of financial technology, RWA tokenization breaks down the barriers of traditional financial markets, achieving "disintermediation" in the financing process, "democratization" of assets, and "frictionless" transactions. This allows a wider range of assets and investors to participate in the market, taking a significant step towards Coase's ideal world. While RWAs still face challenges in terms of regulations, laws, and market infrastructure, their significant advantages in efficiency and cost suggest they will gradually replace traditional methods like IPOs and REITs, becoming the mainstream financing model in the digital financial era. Second, the RWA craze hides significant risks. Currently, RWA tokenization is sweeping the global financial and technology communities with unprecedented enthusiasm. Internationally, from JPMorgan Chase's Onyx platform to BlackRock's BUIDL fund, traditional financial giants have entered the market. Crypto platforms like Chainlink and MakerDAO are also actively promoting various asset classes, including traditional real estate, bonds, art, carbon credits, and even intellectual property, with experiments in issuing RWAs. Following the recent promulgation of digital asset and stablecoin regulations by the Hong Kong SAR government, domestic technology companies and financial institutions are also eager to experiment, launching a series of innovative RWA projects. In this race to be the first, various scenarios and asset classes are hoping to achieve value revaluation and facilitate financing through RWAs. However, amid this enthusiasm, we must remain sober and have a deep respect for financial risks. Looking back at thousands of years of financial history, we can clearly see a pattern: human financial innovation has never truly eliminated or even reduced risk. On the contrary, as the complexity of financial instruments and systems continues to grow, risks are often more cleverly concealed, transferred, and amplified, necessitating a more comprehensive regulatory and supervisory system to control their impact. Almost every major crisis in financial history has been closely linked to the financial innovations of the time. This has been demonstrated throughout history, from the "Tulip Mania" of the 17th century to the "Dot-com Bubble" of the late 20th century, to the global crises of the 21st century. The 2008 global financial crisis is a cautionary tale for the current development of RWAs. Asset securitization itself is a significant financial innovation, bundling illiquid assets (such as mortgages) into marketable securities (such as MBS and CDOs), theoretically enabling risk diversification and increased liquidity. However, in the years leading up to the crisis, in pursuit of higher returns, Wall Street, under the guise of technological advancement and financial innovation, packaged a large number of subprime mortgages with poor credit quality into securitized products. Through complex financial engineering and the "endorsement" of credit rating agencies, these high-risk assets were packaged as seemingly safe AAA-rated securities. However, most investors, even many professional financial institutions, were unable to discern the true risks of the underlying assets. The complexity of the financial system increased dramatically, and transparency declined accordingly. Driven by the market frenzy, lenders no longer cared about the borrowers' actual repayment ability, knowing that these loans would be quickly packaged and sold to the next investor. This "pass the parcel" model severed the connection between risk-takers and risk-makers, leading to a sharp decline in market moral hazard and credit standards, creating a "drunk and intoxicated" financial extravaganza. When house prices fell and subprime loan default rates soared, these seemingly dispersed risks were rapidly transmitted throughout the financial system through a network of interconnected financial derivatives, triggering a global liquidity crisis and credit crunch. The collapse of Lehman Brothers, where I once worked, destroyed a century of glory in an instant, a truly tragic event. Tokenization of RWAs is essentially a continuation and upgrade of asset securitization in the blockchain era. It similarly promises higher liquidity, lower costs, and broader participation. However, no matter how advanced the technology, if the underlying assets used for tokenization are of poor quality, even the most sophisticated tokenization structure cannot create real value and cannot change the fundamental financial principle of "garbage in, garbage out." While technological concepts like blockchain, smart contracts, and decentralized oracles are novel, once they are used to package and conceal the real risks of the underlying assets, they become a new generation of "financial alchemy." If the regulatory system fails to keep pace and establish clear boundaries and bottom lines for innovation, it could sow the seeds for the next crisis.
Third, the prerequisite for asset securitization financing is continuous and predictable cash flow
Amid the wave of RWA tokenization, a dizzying array of technological concepts have emerged: asset on-chain, automated smart contract execution, decentralized identity verification, and oracles providing off-chain data. These technological innovations have undoubtedly opened up unprecedented possibilities for the financial market. However, when we peel back the fog of these novel concepts and return to the essence of finance, we discover an irrefutable truth: the prerequisite for any asset securitization financing must be assets that can generate continuous and predictable cash flows. Technological innovation can change the form of transactions, but it cannot change the source of value. Truly lasting financial innovation should not only reduce transaction costs but also alleviate information asymmetry. In 1970, Nobel laureate in economics George Akerlof proposed the famous "Market for Lemons" theory. This theory states that in a market with information asymmetry between buyers and sellers, such as the used car market, sellers (with more information) know the true quality of their products, while buyers (with less information) can only judge based on the market's average quality. This leads to a vicious cycle: Unable to distinguish between good cars (peaches) and inferior cars (lemons), buyers are only willing to pay an average price based on average quality. This average price is too low for sellers of "peaches," who opt to exit the market. As "peaches" leave, average market quality further declines, and buyers' willingness to pay also decreases. Ultimately, only "lemons" remain in the market, with high-quality products driven out by inferior ones, leading to market contraction or even collapse. This theory perfectly illustrates the dangers of information asymmetry. In the financial market, if investors cannot effectively identify the true quality of assets, they will become skeptical of all products and demand higher risk premiums, which will undermine the financing ability of high-quality assets. However, low-quality assets (financial "lemons") that are cleverly packaged and conceal risks may instead flourish. The bursting of the P2P bubble in China a few years ago is a vivid example of how financial innovation reduces transaction costs but increases financial opacity. During the boom, many P2P platforms promised investors annualized returns of 15% or even higher, but the true investment of these funds remained a vast black box. Instead of flowing to high-quality small and medium-sized enterprises with stable operating cash flows, large amounts of capital were channeled into high-risk speculative projects or even outright Ponzi schemes. When the boom peaked and capital inflows became unsustainable, the entire game collapsed, with some founders absconding with funds and countless investors losing everything. If smart contracts and blockchain technology are used to tokenize assets with unstable or even nonexistent cash flows, they are simply creating and distributing "digital lemons" in a more efficient way, inevitably fueling financial bubbles. Any financial innovation, no matter how flashy, must adhere to the fundamental principles of value creation. For RWA tokenization, this means shifting the focus from hyping novel technical concepts to rigorously screening and managing high-quality underlying assets that generate predictable and sustainable cash flows. The true advantage of blockchain technology lies in its potential to significantly enhance transparency and reduce information asymmetry. Investors should be able to use the blockchain to verify the status of underlying assets in real time, such as the rental income records of a commercial property or the repayment history of a corporate loan. This is the correct approach to help investors distinguish between "peaches" and "lemons." The value of smart contracts lies in reliably and cost-effectively executing distribution agreements based on stable cash flows (for example, automatically distributing rental income proportionally to token holders each month), not in creating value out of thin air. For RWA tokenization to develop healthily, it must firmly adhere to the bottom line of "cash flow is king." Only in this way can RWA truly become a bridge connecting high-quality assets with global capital, rather than the next factory for creating "digital lemons" and financial bubbles. Fourth, prevent three types of projects from exploiting RWA innovation. The enormous potential and market enthusiasm of RWA tokenization will inevitably attract speculators and even fraudsters. These individuals attempt to exploit ordinary investors' unfamiliarity with new technologies and their desire for high returns, packaging their projects under the banner of "financial innovation" to scam investors. We must be wary of the following three types of projects: First, startups or virtual asset projects without cash flow. For ordinary investors, these projects are the quintessential example of "digital lemons." Their most defining characteristic is the complete lack or absence of verifiable operating cash flow. Their entire value is built on expectations and speculation about future asset appreciation. For example, a newly established startup with only a business plan faces immense uncertainty. In traditional venture capital (VC) circles, valuing and investing in such projects requires highly specialized expertise and due diligence, and the failure rate is extremely high. Tokenizing these projects' "future income rights" or "virtual equity" and selling them to the general public poses significant risks. Ordinary investors cannot apply scientific valuation models like discounted cash flow (DCF) to assess these projects, as the core variable in these models—future cash flows—is completely unknown. This makes investing a pure gamble, making it easy for project owners to use exaggerated publicity and market manipulation to drive up token prices, then cash out at a high price, leaving investors devastated. This is similar to the dot-com bubble, when many ".com" companies with no revenue and only concepts were hyped to exorbitant prices. Some projects attempt to package purely virtual assets, such as game props, virtual land, and digital artwork, as RWAs for financing. While some high-value digital collectibles (such as blue-chip NFTs) enjoy a certain degree of market consensus, the vast majority of virtual assets do not generate sustained cash flow. For example, the value of "land tokens" issued by a metaverse project depends entirely on the platform's future user growth and ecosystem prosperity. Conflating them with real-world commercial real estate, which generates stable rents, is extremely misleading. Investors are not buying an "asset" but a high-risk "lottery ticket." The second type is projects with unstable cash flow or deteriorating industry trends. While these projects have some cash flow, their revenue profile is extremely unstable, or they operate in a deteriorating industry environment. Their risk profile is similar to that of ST stocks in the A-share market, facing the risk of bankruptcy and value collapse at any time. For example, a small hotel that relies on seasonal tourism experiences significant cash flow fluctuations between peak and off-seasons. Or a small manufacturing business that relies heavily on orders from a single customer would see its cash flow immediately cut off if it loses that customer. Tokenizing such assets and using cash flow from their best past performance periods as a selling point to promise investors stable returns is extremely imprudent. The transparency of blockchain may reveal historical data, but it cannot predict future volatility. For investors seeking stable returns, the risk of such assets is too high. Furthermore, projects in declining industries warrant caution. For example, a small commercial center located in a remote area experiencing a continuous population outflow, or a business engaged in a declining industry (such as telephone booths or film production). While these projects may still have meager cash flow currently, their long-term trend is clearly downward. Project owners may exploit investors' lack of understanding of macroeconomic trends in a specific industry by embellishing short-term financial data to attract capital, essentially allowing new investors to help existing controlling shareholders. Third, projects with unclear ownership of underlying assets or incomplete legal agreements. This is the most hidden and potentially fatal risk in RWA tokenization. Tokenization presupposes that the issuer has legal, complete, and undisputed ownership or disposal rights over the underlying assets. If the assets themselves are subject to mortgages, seizures, or disputes over joint property rights, tokens issued based on them present significant legal risks. Even if a project appears to have consistent and stable cash flow, if its underlying legal structure is flawed, investors' rights are like castles built on the sand, vulnerable to destruction at any moment. A typical example is the dollar bonds issued overseas by some domestic companies using a VIE structure. There is no equity relationship between the overseas listed entity and the actual domestic operating entity, but rather control is exercised through a series of complex agreements. When the domestic entity defaults on its debt, overseas bondholders find it difficult to directly pursue and liquidate the core domestic assets, as they do not hold direct debt or equity in the domestic company. This risk is entirely possible with RWA tokenization. If an RWA project's legal design is imperfect, and the token merely represents an "electronic profit-sharing contract" with the issuer, without a truly bankruptcy-remote SPV to actually hold the underlying assets, then if the issuer encounters operational difficulties or bankruptcy, investors will be unable to claim rights to the underlying assets and may lose all their investment. V. Three Bottom-Line Standards for RWA Tokenization To ensure the healthy and sustainable development of RWA tokenization and truly protect investor interests, assets planned for tokenization must meet a series of strict standards. These standards constitute the "bottom line" for qualified RWA projects and form the core checklist for investors to conduct due diligence. A high-quality, investment-worthy RWA project must possess at least the following three core characteristics: First, the project must have consistent and predictable cash flows sufficient to cover the investment cost. The essence of finance is value distribution, not value creation. Qualifying assets must generate predictable, non-speculative, and consistent cash flows. Representative assets include: commercial real estate with long-term leases (such as office buildings and shopping malls); toll rights for industrial infrastructure projects (such as highways, power plants, and computing centers); and long-term orders or receivables for agricultural specialty products. In contrast, assets with significant revenue volatility, dependent on market conditions or a single factor, are not suitable candidates for conservative RWAs. The project's expected cash flow, after deducting all operating, management, and tax costs, should be sufficient to cover investors' cost of capital and provide a risk premium commensurate with the risk assumed. For example, an RWA project investing in national infrastructure has lower risk and correspondingly lower expected returns. On the other hand, an RWA project investing in a portfolio of SME loans in emerging markets carries higher risk and should offer higher expected returns. Issuers must also provide prudent and credible financial forecasts and stress tests to demonstrate the reasonableness and robustness of their returns. Second, clear and transparent ownership and strict legal protection of investors' rights to returns are essential. This is the most fundamental cornerstone of RWA tokenization, even more important than cash flow itself. If investors ultimately cannot assert legal rights to the assets, even the most stable cash flow is meaningless. Issuers must be able to provide indisputable legal documentation proving full and exclusive ownership or disposal rights of the underlying assets. This means that the underlying assets must not be subject to any undisclosed mortgages, pledges, legal freezes, co-ownership disputes, or other encumbrances. Real estate must have government-recognized property registration certificates, and debt claims such as accounts receivable must be accompanied by legally valid debt contracts and transfer notices. Furthermore, smart contracts and tokens themselves must be clearly defined within the real-world legal framework. Whether token holders enjoy equity, debt, or some form of income rights must be clearly stated in the offering documents, ensuring that such rights are legal and enforceable in the jurisdiction where the project is located. The tokens purchased by investors must be directly or indirectly linked to claims on the assets held in the SPV. The legal agreement must clearly define the asset disposal process and how proceeds will be distributed among token holders in the event of default or project liquidation. To protect investors from the issuer's own operational risks, qualified RWA projects should also utilize an SPV or similar legal entity structure. The issuer transfers the underlying assets entirely to an SPV independent of the issuer through a "true sale." Even if the original issuer goes bankrupt and liquidates, its creditors have no right to reclaim the assets transferred to the SPV, thus achieving bankruptcy remoteness. Third, investors can gain real-time visibility into the true value of the underlying assets and have operational channels for disposal and transfer. This is the key difference between RWA tokenization and traditional finance, leveraging its technological advantages. It is also a crucial means of reducing information asymmetry and protecting investors. Real-time and transparent information disclosure is a key advantage of blockchain technology. A high-quality RWA platform should utilize technologies such as oracles to upload key operational data of the underlying assets (such as property occupancy rates and rental income, loan repayment status, etc.) to the blockchain in real time and reliably, making it accessible to all token holders. Investors no longer need to wait for the issuer's quarterly or annual financial reports; instead, they can "penetrate" the tokens at any time to examine the true health of the underlying assets. In addition to operational data, the fair value of the underlying assets should be regularly assessed by an independent third-party valuation firm, and the assessment reports should be stored on the blockchain. This provides an important pricing reference for secondary market transactions, preventing disorderly price fluctuations and market manipulation. Investors should not only have the right to buy but also the freedom to sell. RWA issuance platforms should also strive to build a compliant and transparent secondary trading market, allowing investors to easily transfer their tokens. The project's maturity disposal or liquidation mechanism should be clearly defined from the outset of project design. For example, when a loan matures and its principal and interest are repaid, or a property is sold after a predetermined period, how the proceeds are returned to token holders needs to be clearly and transparently defined in smart contracts and legal documents. In summary, these three criteria—financial ballast, legal safety net, and information transparency—together form the core framework of a qualified RWA project. The absence of any one of these criteria could derail a project and create unforeseen risks for investors. 6. RWA Issuers Should Possess Correct Financial Values A successful RWA tokenization issuer must possess correct financial values. This requires not only a solid foundation in fintech but also a deep understanding of the nature of financial innovation and robust risk management capabilities. RWA tokenization is not a new "new species" created out of thin air; rather, it represents the digital age continuation of centuries-old financial practices in asset securitization. From the Dutch East India Company's shares in the 17th century, to mortgage-backed securities (MBS) in the 1970s, to today's RWA tokens, their essence lies in the fragmentation, standardization, and circulation of claims to future cash flows to enhance asset liquidity and diversify risk. Many institutions new to the RWA space often possess strong technical backgrounds, skilled in building complex blockchain architectures and writing sophisticated smart contracts. However, viewing RWA solely as a technical endeavor is misplaced. The core of RWA lies in "A" (Asset) and the underlying financial logic, while "T" (Tokenization) is merely the implementation method and tool. A responsible issuer must respect financial risks and regard risk management as its lifeline. This includes rigorous, multi-round independent audits of smart contracts to prevent code vulnerabilities; ensuring that oracle data sources are reliable and tamper-proof; and establishing secure asset custody and private key management solutions. They must conduct rigorous due diligence and screening of underlying assets, establish scientific valuation models and cash flow stress testing systems, and design appropriate credit enhancement measures (such as overcollateralization and reserve funds) to mitigate potential default risks. Legal agreements must be refined to ensure that every step, from SPV establishment and asset transfer to token issuance, fully complies with securities laws, anti-money laundering, and Know Your Customer (KYC) regulations in relevant jurisdictions. Ultimately, what distinguishes a high-performing issuer from a mediocre or even inferior one is its inherent financial values. Low-quality issuers treat investors as "counterparties," and their business model is centered around monetizing traffic and earning transaction fees. They're obsessed with chasing market trends, packaging concepts, and issuing as many products as quickly as possible, paying little attention to the long-term value of the underlying assets and the ultimate returns for investors. High-quality issuers position themselves as "trustees" of investors, fully aware of their fiduciary responsibility to protect the safety of investors' assets. They believe that the "soul" of finance must harness the "body" of technology, and that the ultimate goal of financial innovation is to serve the real economy and investors, not to become a self-reinforcing speculative game. This leads them to consistently focus on core financial elements such as asset quality, legal structure, and risk isolation when designing products, rather than simply showcasing technological innovation. The future of RWA tokenization does not depend on how many assets we can put on the chain, but on whether we can adhere to the common sense and essence of finance, that is, "asset value comes from continuous and reliable cash flow, and investment confidence comes from information transparency and legal protection." The real goal of RWA tokenization is not to expand the scale of financing, but to help truly good business projects in the real world obtain accurate and convenient financial support through technological and model innovation, thereby improving global labor productivity, making more products and services available for public consumption in the future, and expanding the Pareto optimal welfare frontier of the entire society - this is the original intention and mission of financial innovation.