Written by: Liu Honglin
With the East and the West refusing to accept each other, there seems to be only one concept in the entire virtual currency market that can make everyone reach a consensus, that is, RWA (Real World Assets, tokenization of real assets).
High-risk low-allocation "RWA"
For various reasons, many Web3 entrepreneurs have taken a fancy to the opportunity to raise funds by putting physical assets on the blockchain, issuing tokens or NFTs, especially those who own offline assets such as real estate and artworks. But obviously, things are often not as simple as imagined. Some time ago, the criminal team of Mankiw Law Firm handled a criminal case involving the RWA project, and Attorney Liu Honglin also participated deeply in the service process. Looking back, I think this case is very representative.
In order to protect the privacy of the parties, Lawyer Honglin has partially fabricated and blurred the case. It is only a case discussion and should not be taken seriously. I would like to take this opportunity to talk to you about the legal risks that RWA projects will face if the legal risk prevention and control is not done properly. I hope that all entrepreneurs can avoid the pitfalls.
The story is as follows: An entrepreneur wants to revitalize his real estate project through the RWA model. His plan is to use the future income of real estate as an anchor, issue NFTs through blockchain technology, and then sell them directly to individual customers on the Internet. After investors purchase these NFTs, they can share the income rights of real estate. Initially, the project was well promoted, and the income from real estate seemed to be very guaranteed, which made many users feel that this was a good project that "would make money without losing money", so the sales volume was indeed good in the short term. But unfortunately, the flowers are not red for a hundred days. As the local economy continued to go down, the operating income of the real estate in the project was far lower than expected. After the company's executives began to advance funds out of their own pockets, the project eventually failed. But netizens who participated in the early stage were not happy, especially those friends who took over at high prices in the secondary market, so everyone formed a group to defend their rights and make complaints, and eventually they were filed a criminal case by the public security in a certain place.
This story tells us a simple truth: Even if you have real-world real estate and other physical assets as anchors, and have not fabricated facts or concealed the truth, it does not mean that you are immune to legal risks.
Real asset anchoring ≠ legal risk immunity
In the trend of using virtual to promote real that is encouraged by many local governments, many entrepreneurs think that as long as the NFT I issue is anchored to real assets, everything will be fine. However, they do not know that anchoring assets can increase the credibility of the project, but cannot replace stable operational capabilities, and naturally cannot completely eliminate operational risks.
From our practical experience, many RWA projects are prone to problems because the project owners only focus on how to use asset anchoring to issue tokens, but do not pay attention to the sustainable operation of the project. When the market environment is not as expected and the project owners cannot fulfill their promises to investors, they may be accused of false propaganda at the least, or even suspected of criminal offenses at the worst.
As a Web3 business compliance lawyer, Lawyer Honglin understands that many entrepreneurs, at the beginning of a project, are determined to do a good job rather than just to make money and run away. However, entrepreneurs who dare to take risks often have too high expectations for future returns and tend to ignore market uncertainties. Once the market goes down or operations encounter difficulties, the project's profits cannot be realized, and legal issues will follow.
Navigating the legal minefields of RWA projects
Globally, the concept of RWA is still in the exploratory stage, and different countries have different legal definitions and regulatory methods for it. Many entrepreneurs see the smooth development of overseas RWA projects and are eager to follow up similar models in China, but often ignore the legal environment in China. Mainland China has always been very strict in regulating virtual currencies, and virtual currency transactions, financing and related activities are high-risk areas. Many projects only see the rapid financing effect brought by token issuance in the early stages, but ignore the regulatory requirements behind it. Once a project touches the red line of virtual currency, it may not only face user complaints or civil lawsuits, but also face criminal penalties.
For Web3 entrepreneurs who want to avoid pitfalls in the RWA field, Lawyer Honglin gives them three practical suggestions.
1. Don’t adopt a “shoot and run” mentality
The RWA project is not a financing channel that can be quickly monetized. Many entrepreneurs are eager to pursue short-term gains, thinking that they can quickly raise funds by issuing tokens. This "shoot and run" mentality is very dangerous, especially in an unstable market. Once the project fails to deliver the promised returns, investors will quickly turn to complaints and call the police. Therefore, starting a business is a long-term physical job. You must have a long-term operation plan. Don't expect to make enough money with a wave of operations.
2. The capital pool must be separated
Don't mess with investors' money. After early financing, many projects arbitrarily misappropriate investors' funds for other project development, or even for external cryptocurrency investment. This behavior is not only very likely to cause dissatisfaction among investors, but is also very likely to be regarded as fundraising fraud by law enforcement agencies. Ensuring that the project's funding pool is separated from the company's operating funds and that the use of funds is transparent is the most basic principle of fund management.
3. Actual operation is more important than technical concept
Whether it is blockchain, RWA or NFT, entrepreneurs should remember one thing: no matter how cool the technology is, the project ultimately depends on operations. Investors are interested in whether you can continue to bring profits, and consumers are concerned about whether you can provide stable products and services, not how cutting-edge technology you use. If your business logic is not clear and your operational capabilities cannot keep up, even if the technology is advanced, the project is unlikely to succeed. Do a good job in actual operations and don't be kidnapped by technical concepts. This is the way to survive in the long run.
Lawyer Mankiw's Summary
The RWA project seems to provide a new path for Web3 entrepreneurs, but it is still somewhat unformed at this stage. Today, when we are crossing the river by feeling the stones, RWA is not simply "anchored with assets" and can be immune to legal risks. In mainland China, any tokenized financing behavior involving assets needs to be cautious. If you are not sure about the criminal risks of your Web3 project, it is recommended to find a knowledgeable lawyer to consult and check it out.