How much does it cost for traditional enterprises to enter the RWA space?

Author: J.A.E, PANews

Real estate, new energy, innovative drugs, transportation… The announcements related to RWA (Real-World Assets) from Hong Kong listed companies in various sectors come one after another, like pebbles falling into a pool, stirring the stock market and tugging at the nerves of investors. Many listed companies are eager to learn and explore RWA or digital asset businesses, envious of the soaring stock prices of the pioneers.

RWA is widely promoted for various advantages, such as improving asset liquidity, lowering investment entry thresholds, and simplifying transaction processes. However, the hidden complexities and high costs behind it are rarely known. In reality, RWA projects are not simply about putting assets on-chain through technology; rather, they are a complex practice that seeks to balance business models, legal compliance, and technological innovation.

Which types of assets are suitable for tokenization?

The core definition of RWA is the tokenization of tangible and intangible assets from the real world, such as real estate, private equity, notes, bonds, etc., through blockchain technology, allowing them to circulate, trade, and be applied in the crypto market.

However, RWA tokenization is not a universal choice for all assets; the quality and category of the underlying assets are crucial. An RWA asset suitable for tokenization must possess a certain intrinsic value to have the opportunity to attract significant on-chain liquidity. During an offline event on RWA organized by PANews, several guests discussed what types of assets are suitable for RWA.

First of all, standardization and high liquidity assets are the primary conditions for the successful issuance of RWA products. Mao Jiehao, a senior lawyer at Shanghai Mankun Law Firm, pointed out that in terms of compliance and smooth issuance, financialized products such as money market funds and U.S. Treasury bonds are the most ideal path for RWA tokenization.

Secondly, the yield of RWA products must be sufficiently competitive. Zhang Yuanjie, co-founder and COO of Conflux, pointed out through explaining the basis hedge strategy of the Ethena protocol that the yields of RWA assets not only need to compete with the risk-free rates in the TradFi market (such as US Treasury yields) but also have the ability to contend with the yields of DeFi protocols. To attract more funds, many RWA products adopt a “dual yield” model: the yield from the underlying assets is supplemented by additional token incentives, thereby providing investors with higher potential returns.

On the other hand, some non-standard assets, although highly attractive in narrative, face numerous challenges in actual implementation. According to Zhang Yuanjie, some photovoltaic exchange pile projects in the market, while excellent examples of non-standard asset tokenization linked to the real economy, have poor scalability and liquidity. Such projects, characterized by “loud thunder but little rain,” should not become mainstream assets of RWA due to their inability to meet the core market demands for replicability, scalability, and high liquidity.

The value proposition of RWA has unique market attributes. Zheng Lijiang, research manager at Shanghai Wanxiang Blockchain Co., Ltd., believes that the core advantages of RWA are 1) global price discovery and all-weather liquidity: the trading of traditional financial assets is strictly limited by time and geography, while RWA can achieve seamless trading and global pricing around the clock through blockchain, significantly improving the timeliness and liquidity of asset transactions; 2) combinability and universality: the key advantage of RWA lies in its “programmability.” If the asset is on-chain, it can serve as “LEGO blocks” in the DeFi ecosystem, integrating or combining with other protocols to create entirely new financial products and application scenarios. Moreover, it also possesses “universality,” theoretically greatly reducing the barriers to entry, allowing any investor to participate in the issuance and investment of assets, thereby broadening the investment boundaries; 3) issuance efficiency: compared to conventional asset securitization tools (such as ABS or REITs), RWA has significant advantages in issuance cycle and some costs, such as omitting many cumbersome intermediaries and paperwork, greatly improving the efficiency of asset issuance.

However, behind the booming narrative of RWA, there are some common misconceptions in the industry, such as: 1) Everything can be put on the chain, easily securing financing: This is the most common misunderstanding in the industry. Just because an asset is on the chain does not mean it can automatically secure funding. Whether a project or asset can obtain financing fundamentally depends on its intrinsic value, yield, and risk-return ratio. Blockchain simply provides a more efficient new platform, but the underlying logic of financing has not changed; 2) Asset tokenization is equivalent to asset securitization: Asset securitization addresses the issue of ownership “fractionalization” and there were viable solutions (such as REITs) before RWA emerged. The core functions brought by tokenization are not limited to ownership division, but also include advantages like global price discovery, composability, and universality, which traditional securitization tools cannot provide.

In summary, the positioning of RWA is more focused on being a “layer on top” rather than a “substitute”; it does not replace the rigorous due diligence obligations and asset securitization models in TradFi, but rather empowers assets with the technological advantages of blockchain, allowing them to circulate and appreciate in a global, programmable crypto market, thereby creating richer liquidity and application scenarios for assets.

How high is the cost of doing an RWA project?

Due to the different business model choices involved in the RWA project before its launch, it will also lead to different cost structures. Roy, the founder of QuFu Consulting, revealed in an interview with PANews that, for example in Hong Kong, the RWA project can be divided into two models: one is the single issuance of RWA products, and the other is the long-term layout of RWA business.

RWA product single issuance refers to the issuer completing the tokenization and fundraising of a specific product only once, with the cost range typically between 3 million to 6 million RMB. The high costs consist of several key components, with brokerage fees playing a dominant role.

Legal compliance is the “amulet” for the issuance of RWA products, with costs ranging from 100,000 to 200,000 RMB, used to establish an SPV (Special Purpose Vehicle) structure and ensure compliance with cross-border requirements, especially regarding the compatibility of the legal systems in Mainland China and Hong Kong. Setting up an SPV is a core step in defining legal ownership and isolating asset risks, ensuring that the asset rights represented by the token are traceable and verifiable. Cross-border compliance is even more complex, as it must meet both the legal requirements of Mainland China and the Securities and Futures Ordinance (SFO) of Hong Kong, particularly in terms of capital repatriation and cross-border asset transactions, to avoid potential legal risks. Legal compliance costs are an essential expenditure for any regulated RWA project.

The relatively fixed range of legal compliance costs indicates that the cost of establishing a basic compliance framework is manageable. However, the risks of violations arising from improper handling will be difficult to estimate. If the project cannot operate effectively within the legal framework, all additional investments in technology and fundraising will be in vain. Therefore, legal compliance costs stand at a strategic high ground among all cost items, determining whether the project can successfully “clear customs” and don the cloak of “legalization.”

Technological on-chain is the core engine of RWA tokenization, with costs ranging from 500,000 to 800,000 RMB, used for public chain integration and asset registration, covering the implementation of smart contract development, security audits, as well as synchronization of on-chain data and off-chain asset information. The complexity of assets is the core variable affecting costs. The technical implementation costs for single ownership assets (such as bonds, real estate, etc.) are relatively low; while assets that include multi-layer income distribution mechanisms (such as private equity funds) require the development of more complex smart contracts and integration of on-chain oracles, significantly increasing costs.

Technical selection is a key lever in controlling the costs of RWA projects and also determines the variability of development costs. The choice of public chain and the integration of zero-knowledge proofs, among other technical routes, will directly affect the terminal costs. Projects with strong development capabilities and the ability to issue complex assets typically have higher technical investments than the market average, but this also gives them the ability to design more distinctive and higher-dimensional RWA products, thus creating a differentiated advantage in competition.

Brokerage channels serve as the “credit endorsement” for RWA projects, with their expenditure being the highest cost item for a single issuance of RWA products, reaching up to 2 to 3 million RMB. This fee is charged by licensed Hong Kong brokerages as a comprehensive pricing for their services including compliance control, due diligence, issuance channels, and product underwriting. As a bridge connecting TradFi and the crypto market, brokerages’ licenses, reputation, and professional services constitute an expensive “trust premium.”

The deep logic behind the high costs of brokerage fees is closely related to the difficulty and scarcity of obtaining financial market licenses in Hong Kong. The initial investment and ongoing maintenance costs for obtaining a license are extremely high, resulting in a few licensed institutions controlling key issuance channels, creating a de facto monopoly. The exorbitant fees for issuance channels are the main means for licensed institutions to recover their substantial sunk costs. Therefore, brokerage fees are not only the most obvious entry barrier for RWA product issuance but also fuel the evolution of the RWA market towards “institutionalization,” which will filter out project parties with rigorous business plans and sufficient capital strength, transforming RWA into a category of organized, capital-supported “products.”

The fundraising cost is a function of yield and brand awareness, approximately 2% to 5% of the fundraising amount. Its fees are highly dependent on the intrinsic value of RWA products and market credit. The product yield is a direct reflection of its intrinsic value; the higher the yield, the lower the fundraising difficulty and cost typically are. Brand awareness represents the market’s valuation of its credit, and issuers with high brand awareness can leverage their brand effect to reduce fundraising costs. These two factors collectively determine the financing difficulty and cost of the product, indicating that the pricing logic of RWA products closely follows the fundamental principles of the TradFi market.

QFLP (Qualified Foreign Limited Partner) channel fees are specific costs associated with cross-border capital flows, approximately 1% of the fundraising amount. This fee is paid to meet specific regulatory requirements and to complete the compliant cross-border repatriation of funds from the mainland. Its existence clarifies one point: if RWA products wish to involve qualified investors from the mainland, they must incur additional costs for specific compliance requirements and fund repatriation channels. Issuers must take the channel fees of the target market into consideration when developing their fundraising strategies.

The cost of publicity and promotion is a dynamic variable determined by market pricing. Currently, the publicity cost for RWA is in a “floating” state due to the current market situation. As the RWA narrative is in a rising phase, the media has a spontaneous enthusiasm for reporting on emerging tracks, so the early publicity is largely driven by media self-dissemination, allowing issuers to gain attention at a lower cost. However, this low-cost model is not sustainable. As the RWA market continues to develop and competition intensifies, when the market transitions from the “early” stage to the “mass” stage, specialized services such as public relations, marketing, brand building, and advertising will become essential, and at that time, publicity costs will significantly rise.

For project parties planning to deeply cultivate the RWA field in Hong Kong, the single issuance cost of the product is just the tip of the iceberg. The scaled business layout and compliance maintenance will present greater financial challenges; although the fixed costs are high, they will also create competitive barriers and a “moat” for the project parties.

The initial investment for preparing the RWA business in Hong Kong mainly includes two aspects. First is the establishment of an offshore structure, with costs around 300,000 RMB, which is a necessary step for expanding international financial business.

Secondly, the application for licenses, which is more critical and costly, will determine the breadth and depth of the business based on different types of licenses. The application cost for License 1 exceeds 1.5 million RMB and allows for direct trading of securities, forming the basis for the circulation of tokens in the secondary market; the application costs for License 4 and License 9 range from approximately 1 million to 1.5 million RMB, focusing on providing securities consulting and asset management services; the VASP (Virtual Asset Service Provider) license is the highest level license for token issuance and trading, with particularly high application costs, creating a very high barrier to entry in the RWA field, and HashKey previously spent tens of millions on applying for this license. The enormous sunk costs of applying for the VASP license directly divide market participants into two main categories: a small number of licensed “business parties” with sufficient capital strength and the majority of “product parties” that rely on channels and need to pay expensive fees for each issuance.

Running RWA businesses requires long-term investment in fixed costs, and the core of sustainable capital expenditure is “people,” namely professional audit, compliance, and legal personnel. Labor costs are key to ensuring license validity and maintaining legal business operations, with major cost items including annual audit/legal fees and license maintenance fees. In terms of annual audit/legal fees, the starting price on the mainland is about 100,000 RMB, while in Hong Kong, as an international financial center, professional service fees will be higher; regarding license maintenance fees, the maintenance costs of different licenses vary significantly. License 4 and License 9 have lower maintenance costs, but License 1 and VASP licenses require the establishment of dedicated internal compliance teams and strict annual audits, leading to maintenance costs that are significantly higher than those of ordinary licenses.

The cost structure of RWA projects with “heavy assets” is gradually showing a trend of “oligopolization”, especially the high costs and funding requirements for license applications, which effectively filters out project parties with strong capital strength.

What are the key constraints facing RWA?

In addition to cost barriers, RWA projects also face structural bottlenecks at the ecosystem level.

First is the challenge of technical infrastructure. Certik anti-money laundering product expert Cheng Yuan pointed out that blockchain infrastructure, such as oracles and cross-chain protocols, is still in its infancy and has single point risks. For example, the current oracle market is dominated by Chainlink; if it encounters problems, it could lead to systemic risks in the entire DeFi ecosystem, and the consequences are self-evident for RWAs that need to synchronize off-chain data.

Secondly, there is a vacuum of composite talent. Zhang Yuanjie mentioned that there is currently a shortage in the industry of asset managers who are proficient in both TradFi and DeFi. The absence of such talent has led to many RWA projects struggling to effectively integrate off-chain assets with on-chain protocols, thus failing to fully realize the value proposition of RWA.

Finally, there is a gap in on-chain distribution channels. Zhang Yuanjie pointed out that the current situation of RWA relying on Ethereum ecosystem DeFi protocol distribution is becoming increasingly severe. There is a severe lack of localized on-chain distribution channels in the Asia-Pacific region, which means that even if there are quality assets in the Asia-Pacific region, it is difficult to establish a complete liquidity cycle locally, thereby limiting the fundraising and circulation of local assets. Since the local on-chain ecosystem in the Asia-Pacific is still immature, RWA products in Hong Kong have all chosen to distribute through off-chain brokerage channels rather than DeFi protocols.

On-chain distribution channels have advantages such as cost-effectiveness, globalization, and composability, but they struggle to meet regulatory requirements; conversely, the advantages of off-chain broker channels lie in their high trustworthiness, localization, and compliance, but they come at a very high cost. Both types of distribution channels have their own pros and cons, and specifically for the Hong Kong region, off-chain broker channel distribution may be a more suitable solution.

It can be seen that the large-scale implementation of RWA is not only a localized issue of regulation or cost but is a systematic challenge composed of technology, talent, and channels.