Technology + Finance + Law and Classification: Compliance Strategy for Crypto Businesses (Part 1)

Author: Zhang Feng

Looking back at the P2P internet finance regulatory storm that swept across China between 2014 and 2018, its trajectory from unbridled growth to complete liquidation, provides a profound lesson for the current booming RWA (real-world asset) crypto business. According to statistics, by the end of 2020, the number of operating P2P platforms in China had been completely eliminated, down from a peak of over 5,000, with outstanding balances exceeding 800 billion yuan. This figure highlights the devastating consequences of financial innovation detached from the regulatory framework. The core lesson of the P2P industry's fall from the halo of "financial innovation" to the abyss of "illegal fundraising" lies in a failure to accurately grasp the essence of finance, a disregard for regulatory logic, and an underestimation of legal risks. According to Boston Consulting Group, the tokenized asset market could reach $16 trillion by 2030. This explosive growth hides complex compliance challenges. Many believe that the RWA crypto sector—an emerging field that tokenizes traditional assets like real estate, bonds, and commodities into the blockchain world—will follow a similar historical development path. As the saying goes, "reviewing the past to understand the present," we will build a unique three-pronged approach: technology, finance, and law. We will first establish a new paradigm in which compliance is the core productivity driver. We will then systematically deconstruct the five-tiered warning system for legal and compliance risks facing the RWA crypto sector and propose a categorized and graded compliance strategy to provide practitioners with a clear response framework.

1. A New Compliance Paradigm: From Cost Center to Value Engine

In traditional financial business, compliance is often viewed as a necessary cost expenditure, a "brake" rather than an "engine" for innovation. However, in the RWA crypto business, where "technology, finance, and law" are deeply integrated, cutting-edge practitioners are redefining compliance in practice:

First and foremost, compliance is the cornerstone of building market trust, directly translating into a product's core competitiveness. The core of the RWA business lies in mapping real-world asset rights to the blockchain. Its success hinges on gaining the trust of both traditional financial institutions and emerging crypto market participants. An RWA project that operates robustly within a regulatory framework, undergoes rigorous audits, boasts clear asset ownership, and transparent information disclosure can significantly lower the barrier to entry and the cost of trust for investors. For example, an RWA token licensed in a specific jurisdiction, partnering with a regulated custodian, and regularly issuing audited proof of reserves is undoubtedly more attractive to institutional funds and conservative investors than similar products operating outside of regulation. This trust premium is directly reflected in higher valuations, deeper liquidity, and greater market resilience, making compliance the most effective market access "pass" and brand "moat." Secondly, the integration of compliance processes and technological tools can drive a qualitative shift in operational efficiency, which itself reflects productivity. Codifying and automating compliance requirements (such as KYC/AML, investor suitability, and transaction reporting) through technological innovations such as smart contracts, zero-knowledge proofs, and on-chain analytics can significantly reduce manual operation costs and error rates, enabling near-real-time compliance monitoring and risk mitigation. The integration of this "compliance technology" not only meets regulatory requirements but also optimizes the user experience. For example, a smart contract with pre-defined accredited investor verification enables instant and secure fund settlement, eliminating the cumbersome offline review and lengthy waiting periods in traditional finance. Here, compliance is no longer a tacked-on step at the end of the business process; instead, it is deeply integrated into the design of product architectures, becoming a key driver for improving efficiency and ensuring a smooth user experience. Finally, a forward-looking compliance strategy can secure strategic initiative and long-term growth for the business. In areas where regulatory policies are still in the exploratory phase, proactively communicating with regulators, participating in "regulatory sandboxes," and embracing international best practices means being able to understand, influence, and adapt to the rules earlier. This proactive compliance approach enables companies to foresee and avoid potential compliance pitfalls, survive industry shakeups and tightening policies, and quickly capture the market with their first-mover compliance advantage. During the P2P boom, platforms that proactively sought bank custody and rigorous information disclosure early on, while incurring higher operating costs in the short term, also secured a longer window of survival and a better market reputation. For RWAs, proactively preparing for complex legal issues like data privacy, cross-border regulatory coordination, and risk isolation will help them accumulate valuable institutional and technological capital to navigate the future unification and refinement of global regulation. Therefore, in the RWA competition, the most successful organizations will be those that best integrate technological mastery, financial risk understanding, and legal compliance acumen. Under this model, compliance has undergone a paradigm shift, evolving from a reactive, defensive cost perspective to a core productivity model that proactively creates value. II. Historical Lessons: P2P: The Warning of Regulatory Storms and the Opportunities and Risks of RWAs Coexist The rise and fall of the P2P industry reveals a core principle in the relationship between financial innovation and regulation: any financial innovation that deviates from the regulatory framework will ultimately pay a heavy price. Initially positioned as an "information intermediary" to circumvent financial regulation, P2P has, in practice, devolved into a credit intermediary, accumulating systemic risks such as maturity mismatches, pooling of funds, and self-financing. When regulations tightened across the board, the entire industry faced a cleanup, and numerous platforms were forced to exit the market due to crimes such as illegally absorbing public deposits. From a legal perspective, the fundamental reason for the decline of the P2P industry lies in its business model, which completely aligns with the four elements of the crime of illegally absorbing public deposits, as stipulated in Article 176 of China's Criminal Law: absorbing funds without legal permission from relevant authorities, publicly promoting through media and other channels, promising to repay principal and interest, and soliciting funds from unspecified individuals. This fundamental flaw in legal characterization ensures that platforms, regardless of their size, ultimately cannot escape legal sanctions. The 2016 promulgation of the "Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries" should have provided a path for compliant development for the industry, but most platforms failed to adjust their business models in a timely manner, ultimately leading to systemic collapse. RWA's crypto business surpasses P2P in terms of technological innovation, but its core risk logic is similar. RWA tokenizes traditional assets through blockchain technology, achieving asset fragmentation, increasing liquidity, and optimizing transaction efficiency, embodying the deep integration of "technology + finance." However, this convergence also presents more complex legal challenges: determining the legal nature of tokenized assets, coordinating cross-border compliance, and the legal validity of smart contracts are intertwined, creating a multi-dimensional risk matrix. Looking at global regulatory dynamics, the US SEC's 2017 report on its investigation into the DAO incident concluded that tokens constitute securities. Furthermore, the US has frequently determined that certain tokens constitute securities based on the "Howey Test." Its 2023 lawsuit against Coinbase is the latest interpretation of the securitization nature of crypto assets. Furthermore, the implementation of the EU's MiCA regulation provides a new regulatory framework for the crypto asset market. These international regulatory experiences hold valuable insights for the development of RWA business in China. Under Chinese law, RWA business is also subject to restrictions such as Article 9 of the Securities Law regarding the public offering of securities and the Announcement on Preventing Risks in Token Issuance and Financing. These legal red lines constitute the fundamental boundaries of business compliance.

Third, Five-Tier Risk Warning: A Progressive Deconstruction from Civil Disputes to Model Illegality

Based on reflections on the lessons learned from P2P and analysis of the characteristics of RWA, we propose a five-tiered risk warning model, from the surface to the deep, to provide practitioners with a clear risk identification framework. This model not only considers the legal nature of the risk but also comprehensively assesses the probability of occurrence and the degree of harm, providing a theoretical basis for differentiated compliance strategies.

First Tier: Civil Dispute Risk—Technical Defects and Contractual Loopholes

This is the most superficial risk, primarily arising from imperfect technical implementation and commercial arrangements. In RWA businesses, smart contract coding errors can lead to failed or erroneous asset ownership transfers; oracle data feed price deviations can trigger liquidation disputes; and unclear legal connections between token holders and the underlying asset rights can lead to title disputes. While these risks don't directly raise administrative or criminal red lines, they can erode user trust and impact business sustainability. In RWA scenarios, similar smart contract security technology failures can lead to the erroneous transfer or freezing of real-world assets, triggering large-scale civil claims. From a legal perspective, such disputes should be handled in accordance with the Contract Code of the Civil Code and relevant judicial interpretations. However, the anonymity and decentralized nature of blockchain technology pose challenges to traditional rules of evidence and jurisdiction. The lesson from the P2P era is that seemingly simple disputes over debt transfer contracts, as the business becomes more complex, can escalate into class action lawsuits, ultimately bringing down many platforms. RWA practitioners need to establish a systematic dispute prevention and resolution system, including multiple audits of smart contracts, clear legal document design, and effective client communication mechanisms, to keep civil disputes within a manageable range. In particular, introducing formal verification technology during smart contract development and clearly defining jurisdiction and governing law in legal document design can significantly reduce the probability of civil disputes and the cost of resolution. The Second Layer: Administrative Procedural Violation Risks – Lack of Access and Reporting Failures. This level of risk involves violations of administrative regulatory procedures, primarily manifesting as engaging in activities requiring a franchise without permission, failing to fulfill reporting obligations as required, and inadequate information disclosure. In RWA business, token issuance may infringe upon the procedural requirements for public securities offerings, asset custody arrangements may violate industry-specific regulations, and cross-border operations may overlook local filing procedures. Under China's current legal framework, RWA business may require administrative licenses including, but not limited to, securities business licenses under the Securities Law, derivatives business licenses under the Futures and Derivatives Law, and deposit and loan business licenses under the Banking Supervision and Administration Law. In particular, if asset tokenization is deemed a "securities issuance," compliance with Article 12 of the Securities Law regarding the procedural requirements for public offerings is mandatory; failure to comply will result in administrative penalties. The 2023 US SEC enforcement action against Paxos, the issuer of BUSD, is a vivid example of procedural compliance risks. Looking back at the development of P2P, many platforms initially neglected procedural requirements such as filing and fund custody, believing that "substance over form" was important. Ultimately, they were completely shut down due to procedural flaws when regulations tightened. RWA practitioners should proactively embrace regulation, maintain communication with regulators, and fully understand the procedural requirements for digital assets and traditional financial services in various jurisdictions to ensure procedural compliance in their operations. Especially in cross-border business scenarios, it is necessary to simultaneously meet the procedural requirements of multiple jurisdictions, including the location of the asset, the place of issuance, and the place of transaction, and establish a matrix-style compliance management system. The Third Level: Substantive Administrative Violation Risk – Inadequate Risk Control and Investor Mismatch. This level of risk touches upon substantive compliance issues within the business, primarily manifesting as inadequate risk control mechanisms, lack of investor suitability management, and lax asset quality control. In the RWA business, tokenizing high-risk real estate projects and selling them to ordinary investors without adequate risk warnings and qualified investor screening constitutes a substantive administrative violation. Lack of transparency in the management of stablecoin reserve assets and insufficient liquidity could also lead to regulatory penalties. From the essence of financial regulation, the core of substantive administrative compliance is to ensure that financial risks are manageable and investor rights are fully protected. China's "Implementation Measures for the Protection of Financial Consumer Rights and Interests" explicitly require financial institutions to establish investor suitability management systems. As an emerging financial form, RWAs should also adhere to these basic principles. The collapse of the Terra/Luna ecosystem in 2022 was ostensibly a technical failure of algorithmic stablecoins, but in reality, it stemmed from a systemic lack of risk control mechanisms. This case serves as a wake-up call for risk management in RWAs. The widespread maturity mismatches, insufficient risk reserves, and fraudulent bidding issues on P2P platforms are typical examples of substantive administrative violations. RWA practitioners need to adopt a combination of technical and legal measures, such as establishing a blockchain-based transparent disclosure system, designing dynamic risk assessment models, and implementing rigorous investor certification procedures, to substantively ensure that business risks are manageable. Especially in terms of asset quality control, due diligence standards from the traditional financial industry can be introduced, combined with the traceability of blockchain technology to build a full life cycle risk management system.