Does RWA Bring a Financial Paradigm Shift? Interpreting Hong Kong's Crypto Ambitions from the OSL Selected Sandbox Project

Author: Nancy, PANews

Digital asset finance is a historic opportunity that Hong Kong cannot afford to miss.

Since the official release of the virtual asset policy declaration on October 31, 2022, Hong Kong has become one of the most steadfast and proactive jurisdictions in the global international financial center to embrace Web3 and digital assets. From the Hong Kong government's clear and solemn policy commitments to the institutional support from regulatory bodies like the Securities and Futures Commission and the Monetary Authority, Hong Kong is making significant strides toward the innovative frontier of digital asset finance.

Among these, the tokenization of real-world assets (RWA) is a key component of the Hong Kong government's digital asset finance strategy. Particularly on August 28, 2024, the Hong Kong Monetary Authority officially launched the "Ensemble" sandbox program, which will utilize experimental tokenized currencies to facilitate interbank settlements and focus on the study of tokenized asset transactions. This marks the government's forward-looking layout in the field of tokenized assets and demonstrates Hong Kong's determination to become a global center for RWA tokenization.

According to the latest data from the RWA research platform rwa.xyz, the total market size of RWA currently exceeds $13 billion. BlackRock is even more optimistic, predicting that by 2030, the market value of tokenized assets is expected to reach $10 trillion, which means the potential growth space for RWA in the next seven years could exceed 75 times!

Source: rwa.xyz

Such a vast incremental space lays the market foundation for Hong Kong to become a global RWA tokenization hub. In light of this market opportunity, during the Hong Kong FinTech Week, the licensed digital asset trading platform OSL officially announced its collaboration with Huaxia Fund to launch a tokenized fund project aimed at retail investors in Hong Kong under the Ensemble project framework, and partnered with Franklin Templeton to conduct a proof of concept for on-chain wealth management products (including money market fund tokens).

This article will provide an initial understanding of the "Ensemble" project and analyze the layout and potential of retail RWA products, such as the tokenized fund project explored by OSL in the Hong Kong market, as well as whether Hong Kong could leverage this to achieve a global leading position in digital asset finance.

Hong Kong's Crypto Ambitions Behind "Ensemble"

The "Ensemble" project is not a fleeting initiative in Hong Kong's digital asset finance sector but a profound strategy to secure its ticket in digital asset finance and reinforce its position as an international financial center.

As early as March 2024, the Hong Kong Monetary Authority officially announced the "Ensemble" project, clearly expressing support for the development of Hong Kong's tokenization market, initially focusing on tokenized deposits (i.e., digital forms of commercial bank deposits issued and provided to the public by commercial banks).

Subsequently, the "Ensemble" sandbox will further study and test tokenization use cases, including the settlement of tokenized real-world assets (such as green bonds, voluntary emission reductions, airplanes, electric vehicle charging stations, electronic bills of lading, and treasury management), which may develop into new financial market infrastructure, serving as a bridge between tokenized real-world assets and tokenized currencies in transactions.

Source: Hong Kong Monetary Authority

In fact, the Hong Kong government and financial regulatory agencies have been loosening policies for the digital asset industry for many years and promoting innovative development in the sector. The emergence of the "Ensemble" project is precisely a digital asset finance experimental platform created by Hong Kong in this context. It not only helps Hong Kong establish a compliance-oriented testing system but also provides an opportunity for future digital asset innovation.

As is well known, RWA tokenization refers to the process of tokenizing physical assets (such as bonds, gold, real estate, and other commodities) into digital assets on the blockchain, bringing unique advantages that are hard to match by both on-chain native assets and traditional financial assets:

● Cost-effectiveness improvement: First, tokenization eliminates the need for intermediary brokers, significantly reducing transaction costs and enhancing efficiency;

● Better accessibility: Second, tokenization allows traditional assets to be divided into smaller shares, thereby increasing accessibility and liquidity;

This means that RWA can become a major driving force for the incremental growth of on-chain digital assets, effectively reaching the vast asset pool of traditional markets, such as the global bond market ($133 trillion) and the gold market ($13.5 trillion) — under the framework of tokenization, these physical assets can not only enter the on-chain trading ecosystem but also generate DeFi yields through lending and staking, introducing real yield asset support to the digital asset market and enhancing its value foundation.

Since the financial innovations of protocols like Compound ignited the DeFi summer in 2020, the volume of digital assets has seen significant growth. As of October 25, 2024, the on-chain Total Value Locked (TVL) reached $88 billion. However, compared to the trillions of dollars in tokenizable RWA assets (bonds, gold, stocks, real estate, etc.), this volume still seems insignificant. RWA tokenization may bring strong incremental momentum to on-chain assets.

Source: DefiLlama

It is foreseeable that as RWA tokenization gradually becomes widespread, the on-chain world will undergo deeper transformations, with the boundaries between traditional finance and digital finance becoming increasingly blurred. The asset system on-chain will not only expand significantly in scale but also achieve breakthroughs in compliance and transparency, providing global investors with more diversified choices.

This is precisely the significance of the "Ensemble" project: by building a highly innovative testing platform, Hong Kong is conducting forward-looking explorations for the deep integration of the digital asset finance ecosystem. Its new products and models will serve as a "rehearsal" for the next stage of digital asset innovation in Hong Kong, providing strong momentum for Hong Kong to become a global RWA tokenization hub.

Moreover, the collaboration between OSL, Huaxia Fund, and Franklin Templeton is precisely aimed at jointly promoting the integration of traditional finance and digital asset finance, enhancing on-chain compliance and transparency, and laying a solid foundation for the future expansion of the digital asset market.

Is RWA Tokenization the Unmissable Crypto Opportunity for Hong Kong?

The demand for RWA tokenization in Hong Kong stems from its profound financial cultural background as an international financial center. First, RWA tokenization provides a new opportunity for the integration of digital assets and traditional finance, allowing funds, bonds, equities, and more to be tokenized through blockchain technology and digital assets, thereby enhancing asset liquidity and accessibility.

At the same time, the vast and mature asset targets and scale required by the RWA market are precisely within Hong Kong's comfort zone as an international financial giant — it encompasses a rich variety of financial services, with years of accumulation and extensive experience, a mature risk control system, complete trading infrastructure, and a large customer base.

Therefore, these advantages can help Hong Kong quickly bring RWA assets on-chain, providing compliant and secure trading solutions for the market, becoming a bridge between Web2 and Web3.

Source: Miles Deutscher

In other words, the integration of on-chain and real-world assets is also a solution that is extremely lacking and desired in the fusion of digital asset finance and traditional finance. For this reason, under the framework of the "Ensemble" project, Hong Kong has set four key themes for experimental testing of RWA tokenization — fixed income, investment funds, securitization, and trade finance, with fixed income and investment funds being regarded as the initial experimental focus of RWA tokenization.

Taking OSL's collaboration with Franklin Templeton on the concept validation of tokenized fund products in the Ensemble project as an example, as a leading representative of this exploration, this initiative is expected to promote the on-chain and transparency of fixed-income products, bringing innovative changes to the asset management field:

● Compliance and security: OSL relies on the compliance testing platform of the Hong Kong Monetary Authority to ensure that the tokenized fund meets regulatory standards, providing a safe and reliable investment channel for global investors;

● Increased liquidity and transparency: Tokenization allows fund products to be transparently traded on the blockchain, with assets being able to be divided into smaller units, increasing liquidity and allowing investors to enjoy the liquidity and transparency advantages of decentralized markets;

● Efficiency improvement and cost optimization: Tokenization simplifies the management processes of traditional funds, reducing intermediary costs and making fund products more inclusive, thereby attracting a broader retail investor base;

In short, OSL's collaboration with Franklin Templeton on tokenized investment fund products theoretically not only significantly enhances settlement speed and efficiency but also lowers the entry threshold by allowing small investments, bringing new sources of liquidity to the market and potentially further promoting the development and popularization of the RWA market.

Source: EY

In the future, RWA tokenization, represented by investment fund products, will bring new sources of liquidity to the Hong Kong market and promote its global popularization:

According to EY's predictions, by 2026, institutional and high-net-worth investors are expected to allocate 5.6% and 8.6% of their portfolios to tokenized assets, which also means that in the three years starting from this year, the incremental increase in RWA tokenization investment allocations by institutional and high-net-worth investors will generally exceed 100%.

Retail Products May Be the Explosive Point for RWA?

What has been the most successful digital asset financial product globally in the past five years?

The answer is not hard to guess; it is neither the on-chain financial innovations like Uniswap that ignited the DeFi Summer nor the digital artworks like CryptoPunks that sparked the NFT craze, but rather the stablecoins that have become commonplace.

These stablecoins, which possess RWA attributes and are aimed at ordinary users, have already become one of the widely accepted use cases for digital assets — the number of on-chain accounts for the TRC20 version of USDT alone exceeds 40 million, truly achieving the popularization of blockchain and greatly expanding the user base of Web3 and digital assets.

Major TradFi institutions such as BlackRock, Citibank, Franklin Templeton, and JPMorgan are also focusing on such products, aiming to further expand the application of digital assets in daily financial life. Currently, the circulating tokenized government bond funds led by Franklin's on-chain U.S. government money market fund (FOBXX) and BlackRock's U.S. dollar institutional digital liquidity fund (BUIDL) have nearly reached $1 billion, laying a solid foundation for the application of RWA tokenization products in the retail market.

Objectively speaking, retail RWA tokenization products have the inclusive advantage of attracting more ordinary investors to participate: previously, ordinary investors faced high capital thresholds and complicated trading processes to participate in traditional financial markets such as U.S. government bonds, real estate, or high-end stocks. Now, through RWA tokenization, these assets can be divided into smaller trading units, significantly lowering the investment threshold.

More importantly, retail RWA products enhance risk control capabilities through the transparency of blockchain, providing investors with higher trust and promoting further application and popularization of digital assets in daily financial life. In the field of RWA tokenization in Hong Kong, there are also a number of digital asset companies promoting compliant RWA innovation and promotion.

Among them, OSL, as Hong Kong's first licensed virtual asset platform, plays a key role in this process, especially as it understands the strategic significance of retail RWA products for Hong Kong's digital asset ecosystem. Therefore, it is actively committed to bringing tokenized assets to the mass market, including leveraging its policy advantages as a compliant platform to expand partnerships with traditional financial institutions to provide compliant RWA trading services for clients.

● Hong Kong's first licensed platform with rich experience: As the first trading platform in Hong Kong to be awarded a virtual asset license, OSL has over six years of rich experience in the digital asset industry;

● Extensive collaboration with top traditional financial institutions: OSL has collaborated with UBS, Huaxia Fund, Harvest Fund, Franklin Templeton, and others to promote projects such as digital asset ETFs and investment fund tokenization, establishing solid partnerships;

● Compliance assurance and insurance coverage: OSL adheres to strict regulatory requirements, providing a compliant and secure cooperation environment for financial institution partners, while also obtaining the world's largest insurance coverage of $1 billion, making it the single digital asset custodian with the highest coverage amount and the longest coverage period globally;

● Full product line and comprehensive service license: OSL started with over-the-counter trading in Hong Kong and has now obtained a complete license for providing tokenization projects, offering comprehensive solutions — covering the issuance, custody, trading services, asset distribution, and blockchain technology services of digital securities;

It is important to note that in terms of business models, RWA encompasses multiple levels from underlying infrastructure to upper-layer DeFi. OSL and others can provide underlying infrastructure services, responsible for tokenizing physical assets and custodizing them on-chain; at the same time, they can also engage in intermediate layer services, bringing asset yields into the DeFi space, providing investors with more yield opportunities.

Overall, OSL's layout not only helps Hong Kong strengthen the connection between Web3 and traditional finance but also provides investors with higher trust and a convenient participation experience through compliant asset management and risk control.

Conclusion

For Hong Kong's exploration of digital asset finance, RWA tokenization is indeed a "paradigm shift" worth looking forward to. If a method can be found to legally combine on-chain digital assets with real-world assets and be promoted through retail forms by entities like OSL and Huaxia Fund, it may very well become the next "explosive point" for digital asset finance.

From this perspective, the role played by OSL also highlights Hong Kong's advantages in global digital asset finance innovation — as one of the oldest virtual asset companies in the world, OSL possesses deep expertise in digital assets, which ensures the compliance and transparency of RWA tokenization projects. This is also Hong Kong's unique natural advantage:

It is important to note that as an international financial center, Hong Kong has abundant traditional financial resources, whether it is a mature risk control system, complete trading infrastructure, or a large customer base, all of which support its ability to bring funds, stocks, gold, and other RWAs on-chain, fully unleashing their liquidity.

We are confident in looking forward to its early arrival.