Guosheng Blockchain: What is the "distance" between real assets and RWA?

1. Core Points

In the previous in-depth reports, we elaborated on the logic of stablecoins and RWA. In recent intensive communications with the industry, we found that most current RWAs still rely on trust in the issuer, rather than trust in the asset being "traceable and trackable." This gap is more to be solved by "on-chain native" solutions, which encompass the process from digitization to being on-chain. From the perspective of the issuer, it seems to find a new type of financing method; from the perspective of intermediary institutions, RWA issuance brings new business opportunities for law firms, investment banks, and institutional sales; and from the perspective of holders, if it is only a primary issuance, it is similar to bonds, which does not differ much from traditional debt financing models. However, once secondary trading is considered, we will see the "dividends" of real-world assets to digital tokens, and combining centralized and decentralized trading methods will greatly expand the imaginative space.

Unlike the financial system in the real world, the decentralized RWA assets face several pain points in achieving a deep anchoring of real-world assets with RWA assets on the blockchain: including the need for a new digital identity system suitable for blockchain systems, the credibility and consistency during the on-chain process of real assets, and the development of new RWA asset standards to meet regulatory requirements. Addressing these pain points requires a systematic solution.

This article analyzes three typical pain points in the RWA issuance process.

2. Several Pain Points Facing Real World Asset Issuance (RWA)

2.1 The RWA ecosystem needs a new digital identity system

With the advancement of RWA integrating blockchain cryptocurrency with traditional economic and social assets, decentralized identity verification (DID) has become an unavoidable topic. The traditional financial system is based on a centralized internet, where identity verification is completed through centralized financial institutions/regulatory bodies—such as opening a stock account through a brokerage. However, RWA based on blockchain requires a decentralized identity verification system, namely DID, to manage all cryptocurrency assets. In the traditional internet and financial ecosystem, the accounts of respective intermediary institutions/platforms are not interchangeable, whereas DID is expected to achieve a unified decentralized identity management system.

We can envision that RWA assets, stablecoins, and other cryptocurrency assets from different issuers may be deployed on various blockchain platforms. For example, the popular stablecoin USDT is deployed on multiple public blockchain platforms, which requires multiple private keys to manage different blockchain platforms. Considering the various dApps (Decentralized Applications) in the RWA ecosystem, this becomes even more complicated. The goal of DID is how users can manage the assets and dApps of these blockchain platforms using a single identity system.

In the era of RWA, a set of DID is needed to manage multiple blockchain encrypted asset accounts, verify signatures, dApp applications, service access verification, etc. This is an identity verification system built on the integration and scalability of blockchain; in the traditional Internet world, a single account simultaneously controls stock accounts, bank accounts, and other financial accounts as well as multiple Internet platforms, which is almost unimaginable.

Another real issue with identity verification in the AI era is how to distinguish between humans and AI. In the jungle of AI, many human abilities are likely to be surpassed by AI, and at that time, how can humans achieve self-proof—how can you prove that you are a person and not a machine? This is crucial for ensuring that humans maintain their economic interests and other rights in the future Web 3.0 era. In the AI jungle, how can humans prove they are human—this proof of personhood (PoP) becomes a very important and tricky question. Simply using intelligence tests or videos to differentiate between AI and humans is far from sufficient. Although there are various methods that can ultimately be implemented for proof of personhood (PoP), it is more critical that privacy, autonomy, inclusivity, and rights protection must be prioritized, and technological development must ensure the benefit and protection of individuals.

For digital identity proof in the AI era, it can be distinguished from three levels: the first level is personality proof, which confirms a person's humanity and uniqueness (ensuring that you are a real person); the second level is digital certification, which ensures that only legally verified individuals can perform certain actions, addressing the question, "Are you who you say you are?" similar to the current basic identity verification; the third level is digital identity verification, focusing on answering "Who are you?" This is the most fundamental level of verification, and it is also the level where AI can "take advantage of the chaos," making it the riskiest level.

In the AI era, identity authentication faces new challenges. We believe that starting from human biological characteristics may be a solution, as human biological traits cannot be simulated by AI. This provides a certain solution for identity authentication in the era of RWA and AI.

2.2 In the RWA process, IoT devices ensure the consistency of on-chain and off-chain data.

RWA has now become one of the fastest-growing sectors in the cryptocurrency market, facing a vast real-world wealth landscape, and has become a very eye-catching blue ocean market. The data on the blockchain has tamper-proof characteristics, and through the analysis of historical data, trade traceability and data credibility have been somewhat guaranteed. However, this does not solve all the problems—there are still two core pain points in practical implementation: 1) "On-chain" enterprise data, forming tamper-proof and traceable trusted data to carry out financial services, evidence storage, traceability, and other businesses, but enterprises inevitably have concerns about data privacy. Whether it is core enterprises or suppliers, putting core data on-chain creates a tamper-proof and traceable data chain for financing parties, and companies are bound to worry that their data may be exposed to external risks; 2) In economic trade, on-chain data is indeed credible, but whether the off-chain physical trade and logistics flow are real constitutes the "last mile" pain point in the supply chain. Having just blockchain is not enough; more technological means and mechanisms are needed to solve the practical problems of application landing and docking.

The flow of economic trade in the real world requires IoT devices to achieve a deep binding between offline economic trade activities and blockchain-based RWA assets. The integration of blockchain with technologies like AIoT, where online and offline are linked, is the major direction for industry development. As a tamper-proof and traceable database ledger, blockchain can ensure the authenticity and reliability of the data chain; however, combining online and offline activities cannot be solely solved with blockchain technology. By integrating with IoT, AI, and other technologies, we can achieve a deep binding of online and offline activities, making the flow of goods, data chains, and credit transmission transparent, ensuring the reliability of RWA asset issuance.

2.3 New RWA asset standards are needed to match regulations

Most cryptocurrencies, such as Bitcoin and common ERC-20 standard blockchain token assets, have the characteristic of payment and settlement being immediate in their blockchain accounts. In other words, after a user initiates a transfer of ERC-20 assets, the assets are instantly transferred and settled. This simple account system makes transfers and remittances between users extremely convenient—this stands in stark contrast to traditional financial systems, where cross-border remittances, international payments, and even stock trading cannot achieve immediate payment and settlement, as they all require a certain amount of time to complete final settlement and delivery, mainly due to regulatory requirements.

When RWA and stablecoins enter the traditional financial payment field, it is essential to consider regulatory constraints. Therefore, it has become a necessity to match the new standards for blockchain assets imposed by regulations—such as considering regulatory requirements, tokens (Token) can only be transferred in appropriate quantities under timely and suitable (regulatory approval) conditions, or adapting trading rules according to the different regulatory rules of various countries/regions. In short, the new RWA asset standards need to take into account regulatory reviews, different regulatory rules between regions, and so on.

Currently, the industry has developed some blockchain asset standards suitable for RWA scenarios, typically including ERC-3643, ERC-1400, ERC-1155, etc. However, there is still a need for corresponding solutions regarding how blockchain assets such as Bitcoin can transition to the new standards or how to ensure compatibility with new standard assets.

3. Several Important Issues Faced by RWA Regulation

3.1 RWA Asset Off-chain (On-chain) Trading and Offshore Issues

The SEC begins to focus on RWA compliance, especially concerning off-chain (on-chain) trading and offshore issues. Recently, SEC Commissioner Hester Peirce issued a comprehensive warning to companies considering the distribution and trading of tokenized securities. She stated, "Although blockchain technology is powerful, it does not have the magical ability to change the nature of the underlying assets; tokenized securities are still securities. Therefore, market participants must consider and comply with federal securities laws when trading these instruments." She also emphasized that if the relevant tokens cannot provide legitimate ownership of the underlying securities and benefits, they will be classified as "swap contracts" prohibited for off-exchange retail trading.

Currently, the circulation of RWA assets based on DeFi platforms does not comply with securities laws and other regulatory rules, and there is no clear plan from regulators to manage DeFi platforms and other "on-chain" financial markets. A highly anticipated scenario for stock tokenization is its use on blockchain-based DeFi (Decentralized Finance) platforms, which evidently represents an over-the-counter trading method for traditional financial markets. Currently, on blockchain-based DeFi platforms and other on-chain markets, KYC/AML regulations have not been implemented, and they do not settle within the trading platforms and settlement systems regulated by authorities, nor do they possess tax capabilities. Similar to stablecoins, stock tokens and other RWA assets also face the issue of offshore settlement—meaning RWA assets are settled directly on the blockchain rather than within the traditional financial market system. For regulators, the circulation of these RWAs falls outside the scope of market regulation, leading to tax issues.

Therefore, the statement by the SEC commissioner serves as a warning about the current situation. If the RWA system is regulated strictly according to the current securities laws, then the regulatory constraints would be very different from the reality of the current on-chain financial ecosystem.

For businesses, a practical issue is how to incorporate RWA assets into financial statements. According to the above analysis, if RWA assets are traded on on-chain DeFi platforms, there are risks such as counterparty risk and market liquidity risk (note that there may be multiple isolated trading markets on-chain, so relevant assets may have multiple different market prices). How to incorporate these assets into the company's financial reports and accurately reflect the market value and risks of the relevant assets is also a complex practical issue.

Additionally, for underlying assets such as stocks and bonds, issuers issue RWA tokens based on these underlying assets; how the income generated from these underlying assets is distributed to RWA token holders? This is also a complex operational issue.

The above are several typical issues faced by RWA regulation, and there are more details to be discussed and improved. In short, the implementation of RWA from a regulatory perspective still faces many challenges.

4. Investment Advice: Focus on RWA and Stablecoin Related Sectors

We believe that with the promotion of stablecoin-related regulatory legislation in the United States and Hong Kong, there will be rapid development in the RWA and stablecoin markets, and the tokenization of U.S. stocks will be the next important track for RWA. Currently, stablecoins and RWAs are still primarily focused on thematic investments, and the market should pay attention to the related progress and catalysts of U.S. stock tokenization in the U.S. market, and we recommend focusing on the relevant targets in the RWA and stablecoin industry chain.