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

Written by: J.A.E, PANews

Real estate, new energy, innovative drugs, travel… The announcements related to RWA (Real-World Assets) from Hong Kong-listed companies in various sectors are coming one after another, like pebbles falling into a pond, stirring the stock market and triggering the nerves of investors. Envying the soaring stock prices of the pioneers, many listed companies are intensifying their study and exploration of RWA or digital asset businesses.

RWA is widely promoted for various advantages, such as improving asset liquidity, lowering investment entry barriers, and simplifying trading processes. However, the underlying complexities and high costs associated with its implementation are rarely known. In reality, RWA projects are not simply about putting assets on the blockchain through technology, but rather a complex practice of seeking balance among business models, legal compliance, and technological innovation.

What types of assets are suitable for tokenization?

The core definition of RWA is to tokenize tangible and intangible assets from the real world, such as real estate, private equity, notes, bonds, etc., through blockchain technology, making them tradable, exchangeable, and applicable 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 certain intrinsic value to have a chance of attracting significant on-chain liquidity. During an RWA offline event hosted by PANews, several guests discussed what types of assets are suitable for RWA.

First of all, standardized and highly liquid 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 US Treasury bonds are the most ideal path for RWA tokenization.

Secondly, the yield of RWA products must have sufficient competitiveness. Zhang Yuanjie, co-founder and COO of Conflux, pointed out through the explanation of the basis hedging strategy of the Ethena protocol that the yield of RWA assets not only needs to compete with the risk-free interest rates in the TradFi market (such as U.S. Treasury yields) but also must be able to compete with the yields of DeFi protocols. To attract more funds, many RWA products adopt a “dual yield” model: the yield of the underlying assets is augmented by additional token incentives, thereby providing investors with a higher potential return.

On the other hand, while some non-standard assets are very attractive in narrative, they face many challenges in practical implementation. According to Zhang Yuanjie, some photovoltaic battery swap station projects on the market, although excellent examples of the tokenization of non-standard assets linked to the real economy, have poor scalability and liquidity. Such projects that are “loud in sound but small in rain” should not become mainstream assets for RWA because they fail 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., believes that the core advantages of RWA are: 1) Global price discovery and round-the-clock 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) Composability 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. In addition, it also possesses “universality,” which theoretically will greatly lower 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 certain costs, such as eliminating many cumbersome intermediaries and paperwork, greatly improving the efficiency of asset issuance.

However, behind the popularity of the RWA narrative, there are some common misconceptions in the industry, such as 1) Everything can be on-chain, easily securing financing: This is the most common misunderstanding in the industry; putting an asset on-chain does not automatically mean it can secure funding. Whether a project or asset can obtain financing fundamentally depends on its intrinsic value, yield, and risk-return ratio. Blockchain merely 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 already viable solutions (such as REITs) before RWA emerged. The core functions brought by tokenization are not limited to ownership division but also include advantages such as global price discovery, composability, and universality that traditional securitization tools cannot provide.

In summary, 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 instead empowers assets with the technological advantages of blockchain, allowing them to circulate and appreciate in the globalized, programmable crypto market, thereby creating richer liquidity and application scenarios for the assets.

How much does it cost to do an RWA project?

As the RWA project involves the selection of different business models before its launch, it will also lead to different cost structures. Roy, the founder of Qufu Consulting, revealed in an interview with PANews that, taking the Hong Kong region as an example, RWA projects can be divided into two modes: one is the single issuance of RWA products, and the other is the long-term layout of RWA businesses.

The single issuance of RWA products refers to the issuer completing the tokenization and fundraising of a specific product only once, with cost ranges typically between 3 million to 6 million RMB. The high expenses consist of multiple 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 the SPV (Special Purpose Vehicle) framework and ensure it meets cross-border compliance requirements, especially the compatibility of legal systems between the mainland 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 tokens are traceable and verifiable. Cross-border compliance is more complex, as it must satisfy both the legal requirements of the mainland and the Securities and Futures Ordinance (SFO) of Hong Kong, particularly regarding fund repatriation and cross-border asset transactions, in order to mitigate potential legal risks. The cost of legal compliance is an essential expense for any regulated RWA project.

The relatively fixed range of legal compliance costs indicates that the cost of building a basic compliance framework is relatively controllable. 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 “legalization” cloak.

The technology 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 functions such as smart contract development, security audits, and synchronization of on-chain data with off-chain asset information. The complexity of assets is the core variable affecting costs. The technical implementation cost of single ownership assets (such as bonds and real estate) is relatively low; whereas assets that include multi-layered profit distribution mechanisms (such as private equity funds) require the development of more complex smart contracts and the integration of on-chain oracles, significantly increasing costs.

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

Brokerage channels serve as the “credit endorsement” for RWA projects, with their expenditure being the highest cost item for single issuances 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 services such as compliance control, due diligence, issuance channels, and product underwriting. As a bridge connecting TradFi and the crypto market, the brokerage’s 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 high initial investment and ongoing maintenance costs associated with obtaining licenses have resulted in a few licensed institutions controlling key issuance channels, creating a de facto monopoly. The exorbitant issuance channel fees are the main means by which licensed institutions recover their substantial sunk costs. Therefore, brokerage fees are not only the most visible 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, turning RWA into a type of organized and capital-supported “product.”

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

The QFLP (Qualified Foreign Limited Partner) channel fee is a specific cost of cross-border capital flows, approximately 1% of the fundraising amount. This fee is paid to meet specific regulatory requirements and to ensure the compliant repatriation of Mainland funds. Its existence clarifies one point: if RWA products want qualified investors from Mainland China to participate, they must incur additional costs for specific compliance requirements and capital repatriation channels. Issuers must consider the channel fees of the target market when formulating their fundraising strategy.

The cost of publicity is a dynamic variable determined by market pricing. According to the current market situation, the publicity cost of RWA is in a “floating” state. As the narrative of RWA is in an upward phase and the media has a spontaneous enthusiasm for reporting on emerging sectors, the initial publicity is mainly 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. At that time, publicity costs will rise significantly.

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

The initial investment in 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, there is the more critical and costly license application, where different types of licenses will determine the breadth and depth of the business. The application cost for License No. 1 exceeds 1.5 million RMB and allows direct trading of securities, forming the basis for the circulation of tokens in the secondary market; the application costs for License No. 4 and License No. 9 range from about 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, constituting a very high barrier to entry in the RWA field. HashKey once spent tens of millions to apply for this license. The huge sunk cost of applying for the VASP license directly divides market participants into two major 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 business requires long-term investment in fixed costs, with the core of ongoing capital expenditure being “people”, namely professional audit, compliance, and legal personnel. Labor costs are key to ensuring license validity and maintaining legal operations, with major cost items including audit/legal annual fees and license maintenance fees. In terms of audit/legal annual fees, the starting price on the mainland is about 100,000 RMB, while Hong Kong, as an international financial center, will have even higher professional service fees; regarding license maintenance fees, there are significant differences in maintenance costs for different licenses, with licenses 4 and 9 having lower maintenance costs, but licenses 1 and VASP require a dedicated internal compliance team and strict annual audits, resulting in their maintenance costs being substantially higher than ordinary licenses.

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

What are the key shackles faced by RWA?

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

First, there is the challenge of technical infrastructure. Cheng Yuan, an expert in anti-money laundering products at Certik, pointed out that blockchain infrastructures such as oracles and cross-chain protocols are still in their infancy, presenting single point risks. For example, the current oracle market is dominated by Chainlink, and if it encounters issues, it could lead to systemic risks in the entire DeFi ecosystem. The consequences are evident for RWA, which requires synchronizing off-chain data.

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

Finally, there is a lack of on-chain distribution channels. Zhang Yuanjie pointed out that the current situation of RWA relying on the distribution of Ethereum ecosystem DeFi protocols is becoming increasingly severe. The localized on-chain distribution channels in the Asia-Pacific region are severely lacking, meaning that even if there are quality assets in the Asia-Pacific region, it is difficult to establish a complete liquidity cycle locally, which in turn limits the fundraising and circulation of local assets. Due to the immature on-chain ecosystem in the Asia-Pacific region, RWA products in Hong Kong have all chosen to distribute through off-chain brokerage channels instead of DeFi protocols.

On-chain distribution channels have advantages in terms of cost, globalization, and composability, but they struggle to meet regulatory requirements; conversely, the advantages of off-chain brokerage channels lie in their high trust, localization, and compliance, but they are extremely costly. Both types of distribution channels have their own pros and cons, and specifically for the Hong Kong region, off-chain brokerage channel distribution may be a more suitable solution.

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