Author: Zhang Feng
Fourth Level: Risk of Substantial Violation of Financial Regulation—Systemic Risk and Regulatory Arbitrage
This level of risk touches the core bottom line of financial regulation, primarily manifesting as the potential for triggering systemic risk, engaging in regulatory arbitrage, and undermining financial market stability.If RWAs convert illiquid assets into liquid assets on a large scale through tokenization without establishing corresponding risk management mechanisms, they could become a new channel for risk transmission. If arbitrage is conducted by exploiting regulatory differences across jurisdictions, the overall effectiveness of financial regulation would be undermined. From a macroprudential regulatory perspective, RWAs may trigger systemic risks in two ways: first, through liquidity conversion, they convert illiquid assets into liquid tokens, creating maturity transformation risks similar to those experienced by traditional banks; second, through interconnectedness, they transmit crypto market risks to traditional financial markets. The China Financial Stability Report released by the People's Bank of China clearly indicates that the increasing correlation between crypto assets and the traditional financial system may lead to risk transmission, requiring RWAs to establish effective risk isolation mechanisms. The problems of fund pools, self-financing, and high leverage that have emerged in the P2P industry in its later stages have essentially evolved into a shadow banking system, posing a threat to financial stability. RWA practitioners must implement proactive, institutional measures, such as establishing risk firewalls with the traditional financial system, participating in regulatory sandbox testing, and designing business structures with built-in risk controls, to avoid negative impacts on financial system stability. In particular, a comprehensive, systemic risk assessment should be conducted during the business model design phase to ensure that a single business failure will not trigger a chain reaction. Fifth Level: Risk of Illegal Basic Business Model—Misaligned Legal Definitions and Fundamental Conflict
This is the lowest level of risk, indicating a fundamental conflict between the business model itself and the existing legal system. If RWA business is deemed to constitute unauthorized public deposit-taking, securities issuance, or insurance business, and fails to meet the substantive requirements of the relevant laws, the entire business model faces fundamental challenges. From a legal perspective, RWA businesses may incur criminal risks under Article 174 of the Criminal Law regarding the crime of establishing a financial institution without authorization, Article 176 regarding the crime of illegally absorbing public deposits, and Article 192 regarding the crime of fundraising fraud. Especially under the current regulatory environment, financing activities conducted through tokenization are highly susceptible to being deemed "substantially engaged in financial business," thereby triggering relevant criminal provisions. The 2023 "Decision on Amending the Interpretation on Several Issues Concerning the Specific Application of Laws in the Trial of Criminal Cases of Illegal Fundraising" issued by the Supreme People's Court of China further clarified the legal boundaries of various new types of financing activities, providing important legal reference for RWA businesses. The P2P industry's final classification as "illegal fundraising" demonstrates that if a business model conflicts with the fundamentals of financial law, no matter how innovative its packaging, it is difficult to avoid legal challenges. RWA practitioners should conduct a thorough qualitative legal analysis at the initial stages of business design and decisively adjust or abandon any business directions that may violate the underlying model. Especially during business innovation, they should adhere to the principle of "same business, same risks, same rules" and avoid circumventing substantive regulation through technical packaging. Fourth, Classified Compliance Strategy: Integrating Technology, Finance, and Law
Faced with multi-layered risks, RWA practitioners need to adopt a classified and graded compliance strategy that organically integrates technological capabilities, financial logic, and legal rules. This integration is not only reflected in the application of technology but also requires the development of a compliance ecosystem that integrates institutions, technology, and law. (I) Civil Dispute Level: Mechanized Response Establish a dispute prevention mechanism driven by both technology and contracts. Technically, formal verification should be used to ensure the security of smart contracts, and a decentralized arbitration mechanism should be introduced to handle on-chain disputes. Legally, legal documents should be designed to clearly define responsibilities and resolve disputes in various situations. By embedding dispute resolution mechanisms into business design, dispute resolution costs can be reduced and user experience can be maintained. Specifically, dispute resolution clauses can be embedded in smart contracts to specify arbitration triggering conditions in specific circumstances; blockchain oracles can be used to facilitate external legal fact-finding; and multi-signature mechanisms should be designed to address contract execution anomalies. Furthermore, legal documents should clarify the relationship between on-chain operations and offline rights and interests to avoid unclear legal relationships due to technical characteristics. This integrated solution of "code is law" and "law is code" is the foundational guarantee for RWA business compliance. (II) Administrative Procedural Violations: Actively Embrace Regulation Adopt a proactive compliance strategy of "communication + adaptation." Actively communicate with regulators about business models and participate in regulatory sandbox programs; establish a cross-jurisdictional compliance monitoring system to track global regulatory developments in real time; design modular compliance solutions to quickly adapt to the procedural requirements of different jurisdictions. Reduce operational risks by productizing compliance procedures. In practice, draw on the compliance management experience of traditional financial institutions to establish a dedicated regulatory relationship management team; participate in industry self-regulatory organizations to jointly develop technical standards and business specifications; and utilize RegTech (regulatory technology) solutions to automate regulatory reporting and information disclosure. Especially in cross-border operations, a compliance strategy of "home country regulation + host country adaptation" should be adopted to ensure global consistency while meeting specific local requirements. (III) Substantive Administrative Violations: Technical and Legal Collaborative Prevention Build a three-dimensional defense system of "regulatory technology + compliance design." Leverage blockchain to achieve transparency and real-time monitoring of asset flows; identify abnormal trading patterns through big data analysis; and codify investor suitability requirements to ensure that business operations comply with substantive regulatory requirements. Furthermore, deeply integrate compliance concepts into product design, rather than resorting to post-hoc remediation. Specific measures include: deploying on-chain analytical tools to monitor large, abnormal transactions; establishing dynamic risk assessment models to adjust business parameters in real time; and achieving "selective transparency" through technologies such as zero-knowledge proofs, thereby protecting business privacy while meeting regulatory requirements. In terms of investor protection, smart contracts can be used to implement automated suitability management, such as setting investment limits and risk exposure for different tiers of investors. (IV) Substantial Violations of Financial Regulation: Institutional Risk Isolation Design a "risk buffer + business stratification" response mechanism for systemic importance. For potentially systemically important businesses, establish risk firewalls from the traditional financial system; isolate high-risk segments through business spinoffs; and introduce traditional financial institutions as specific roles to share systemic risks. Through mechanism design, ensure that business innovation does not endanger financial stability. Specific solutions include: establishing independent entities to operate high-risk businesses to avoid risk contagion; transferring some risk through reinsurance mechanisms; and introducing stress testing and scenario analysis to assess risk tolerance under extreme circumstances. In particular, with regard to liquidity risk management, a liquidity reserve system similar to that used in traditional finance should be established to prevent bank runs. (V) Basic Model Violations: Bottom-Line Thinking and Forward-Looking Adjustments Adhere to the bottom-line compliance principle of "legal characterization first, continuous monitoring." Conduct in-depth legal assessments before innovating new businesses to avoid crossing legal red lines; establish a regular legal review mechanism to adjust business directions based on regulatory trends; and adopt a conservative strategy or seek clear legal advice for areas of ambiguity. Maintaining legal bottom lines is a prerequisite for sustainable development. In practice, a compliance committee composed of internal legal affairs, external lawyers, and industry experts should be established to conduct pre-emptive reviews of innovative businesses; conduct regular compliance audits and risk assessments; closely monitor legislative developments and regulatory cases, and adjust business strategies in a timely manner. Especially before scaling a business, it's important to obtain authoritative legal advice to clarify the business's legal characterization and compliance requirements. V. Conclusion: Finding a Balance between Innovation and Compliance As a fusion of "technology + finance + law," the healthy development of RWA crypto services relies on coordinated adherence to three types of regulations. The lessons of P2P lending show that "innovation" that ignores the essence of finance and legal regulations will ultimately pay a price; the opportunities of RWA demonstrate that businesses that incorporate technological innovation into a compliance framework will have long-term value. Practitioners should abandon the "development first, compliance later" mentality and establish a categorized and graded risk identification and response system, adopting differentiated strategies for different risk levels. Only by striking a balance between passion for innovation and rational compliance can the RWA crypto business avoid repeating the mistakes of P2P and truly unleash its enormous potential to transform traditional finance. In an era of accelerating convergence between digital assets and the real world, practitioners who can organically combine technological capabilities, financial logic, and legal acumen will not only gain an advantage in competition but also contribute to building a more secure, efficient, and inclusive financial ecosystem. Compliance is not the opposite of innovation, but rather the cornerstone of sustainable innovation—this is the most valuable lesson left by the P2P regulatory storm and the path that the RWA crypto business must follow to mature. With the development of China's digital economy and the opening of its financial markets, the RWA business, under an effective regulatory framework, has the potential to become a bridge connecting traditional finance and the digital economy. However, the realization of this vision depends entirely on the compliance choices and strategic vision of practitioners today.
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