Author: Ye Kai, Mankiw Blockchain Legal Services

 

The most fearful thing about an article is that it is long and boring. Sometimes, once it starts, it can't be stopped. The topic has come to the RWA exchange. Since the Hong Kong Web3 Conference last year, some bigwigs have been pulling together to set up an exchange. At that time, I was not optimistic about the licensed and compliant exchanges in Hong Kong. Instead, I researched the regional markets in Dubai and South America and the possibility of RWA vertical exchanges for a long time. Of course, I also visited many friends in exchanges and learned in depth about the ecology of cryptocurrency exchanges, especially the gray wash industry, as well as the core operating community head and investment flow. Several friends also submitted applications for licenses before the deadline at the end of March this year. At that time, I was not optimistic about Hong Kong's license application and the subsequent Bitcoin ETF. Sure enough, several Hong Kong exchanges that applied for the No. 7 license have withdrawn in the past few days. I believe that more institutions will withdraw in the future.

Putting aside the US's actions against a certain exchange, the offshore Binance, OKX and Huobi have recently seen a flurry of token sales, and none of them have taken over. The Hong Kong licensed exchange HashKey (Hong Kong site) is compliant but has no trading volume and liquidity. It has only had some trading volume after the international site went online, but it is still mostly a slice of the existing pie in the current cryptocurrency market. Are there new opportunities in this chaotic fog?

01 The next opportunity for exchanges

Will RWA Exchange be the next decisive opportunity for Binance, OKX and licensed exchanges?

Those who understand know that the current native cryptocurrency exchanges are already very mature, especially the series of exchanges dominated by Chinese, represented by Binance, OKX and Huobi. In terms of trading scale, if Binance does not encounter the suicidal problem of Huobi, OKX basically has no chance of surpassing it, and second-tier exchanges such as KuCoin and Gate will also find it difficult to surpass and subvert the first-tier exchanges.

It is basically difficult to surpass a new offshore exchange, because this set of gameplay is already very mature, relying on the gray industry, similar to a casino, the main community head and investment flow marketing methods, the Chinese team can't be more lucrative, it's all the same people and those methods, it's nothing more than the difference between fifty steps and a hundred steps. If you create a new one, you can get a small piece of the cake, but it's hard to surpass it.

However, licensed exchanges in Hong Kong are a false proposition. The regulatory agencies are still the old financial guns. The so-called innovative products such as STO security tokens and Bitcoin spot ETFs are still the vested interest groups of traditional financial institutions. The Hong Kong Stock Exchange intermediaries are dividing the pie, and it is impossible to really hand it over to the emerging forces of Web3.

OKX and Binance have been working on Web3 wallets for a long time, but the inscription runes, runes, memecoin, etc., were hot for a while but did not hold up, and there was no long cycle and no transaction volume. Even BTC core has been worried about the inscription runes, and it is almost difficult to support a large new ecosystem with this.

On the contrary, the US Bitcoin spot ETF is much more solid than the Hong Kong Bitcoin spot ETF. The key is that the US Bitcoin ETF reminds us that if we want to expand, we still have to think about the old money and incremental users in the real world.

On the whole, Binance and OKX have already been in big business in the existing cryptocurrency market. Their only chance is not the Web3 wallets and new memecoins that have been around for so long, but the RWA (+DePIN) exchanges/tracks that tokenize real-world assets.

02 RAW or Match Point?

The next showdown between Binance and OKX, at RAW?

Why do I say this? Because the largest incremental market is in real-world assets.

I listed the figures of real-world assets in my first RWA article, using global currency and market data in 2020 as a reference (in US dollars): silver 43.9 billion, gold 10.9 trillion, stocks 89.5 trillion, global debt 253 trillion, real estate 280.6 trillion, derivatives 558.5 (low point) ~ 100 trillion (high point), not including emerging assets such as AI computing power, renewable energy and green energy.

Incremental market, we can recall: What is the core reason for this round of BTC rising cycle? Basically, everyone will think of it because of Bitcoin spot ETF. What is the core essence of ETF? It is a product that connects the real world with Bitcoin. It is a typical RWA model product, traded on the New York Stock Exchange, Chicago Stock Exchange and Nasdaq, and Bitcoin spot trading is taken over by Coinbase, which directly drives in tens of billions of dollars of funds, and the incremental daily trading volume is close to four or five billion US dollars.

At present, the only largest incremental market is the real-world assets, funds, and users. We have always emphasized that the essence of RWA is corporate financing, and the core of corporate financing is the institutional market. The mainstream assets and funds in the real world are in the hands of the corporate and institutional markets. Moreover, RWA products allow incremental new users to use conventional credit cards or pension accounts on traditional exchanges without the need for complex digital wallets. RWA tokens or digital assets have professional custody and trading platforms.

Going back to the Bitcoin spot ETF, in addition to the listed companies in the United States, the fund institutions that followed the ETF, including the pilot investments of banks and pension funds, etc., you only need to analyze one thing, look at the proportion of Bitcoin ETF in its investment allocation and the asset allocation classification before it came in, and you will know how big the space behind RWA assets is.

When it comes to real-world assets, RWA exchanges cannot do without DePIN.

The combination of RWA and DePIN is an effective representation of the mapping or anchoring of real-world assets. DePIN is the infrastructure for the issuance of real-world assets on the chain. Its essence is the on-chain 3.0+ asset tokenization of the Internet of Things IoT. The leading exchanges have long had DePIN tracks, but judging from the DePIN projects that have been listed, it is difficult to directly generate cash flow value if it is based on current WiFi or data sharing projects; but as the infrastructure for the issuance of RWA assets, it can directly generate RWA token value during the asset issuance and trading process, and this RWA token cash flow can be further combined into RWA products.

In the real world, DePIN combines DAO and smart contract SPV and crypto funds (token dividends or liquidity) to make RWA asset issuance and anchoring more on-chain and native (the implementation model is complex enough to be discussed in detail in a separate article).

So let’s sort it out:

Offshore leaders such as Binance, OKX and Huobi are all native token exchanges, which started from the earliest ICOs and contracts and have grown to become the first echelon. Offshore's target customer group is basically retail cryptocurrency traders.

Coinbase in the United States is semi-offshore and semi-licensed. When Binance was restrained by the United States and passed the Bitcoin spot ETF, it successfully took over this huge traffic. Coinbase's customer base is relatively complex. In addition to retail investors, ETF has brought in many institutional customers.

HashKey (Hong Kong Station), a licensed exchange in Hong Kong, follows the path of compliance, mainstream tokens and securitized tokens. It mainly serves PI customers, with relatively few restrictions on retail investors. The overall trading volume is not large, and most of it is non-currency-based, especially focusing on compliant deposits and withdrawals.

In fact, there is also the Hong Kong Stock Exchange. Although Hong Kong stocks have declined and trading volume has dropped sharply, it has relied on conservative supervision to compete for power and seized the dominance of the Hong Kong Bitcoin spot ETF. With a bunch of brokerage brokers to share the meat, I seriously doubt that STO will also Similarly, most of the target customer groups of the Hong Kong Stock Exchange are institutional clients and PI investors, which are equivalent to traditional investors and investment institutions that speculate in Bitcoin concept stocks.

So, do you still expect any revolution or subversion from Hong Kong’s licensed exchanges?

We should seriously think: Is the RWA exchange the only opportunity to attract old money with real-world assets between offshore exchanges and licensed exchanges?

03 The key to RAW Exchange

Although RWA has a huge market space, due to its cross-border or connection between the real world and the crypto world, it greatly requires correct promotion, popularization of knowledge, professional education, consulting incubation, investment consulting, etc. The future popularization of real-world asset tokenization involves a large amount of migration, uplift, trading and delivery, and RWA exchanges and their ecological institutions will become the key.

However, the current licensed exchanges and many so-called RWA exchanges or RWA asset protocols have basically only solved the problem of asset issuance, such as STO asset protocols, or NFT voucher models, or STO asset tokenization standards and processes, which came to an abrupt end after the tokenization went online. Practitioners have not yet solved the four problems of market structure, market participants (2B and 2C), native tokens, and liquidity.

If we look at it from the perspective of RWA and draw on the experience of traditional exchanges, we will find that the market structure of an exchange is relatively complex, from the underlying assets and funds of the transactions and the trading methods, to the classification of market participants and their trading characteristics, to the layout of trading channels at different levels of the exchange, and so on.

RWA exchanges must first analyze the funding strategy. First, compared with Hong Kong stocks, the special feature lies in the funds for the exchange of assets between China and the United States. The decoupling of China and the United States has led to a decline in the role of the Hong Kong Stock Exchange and the loss of liquidity. But from the perspective of RWA, can it take over these funds for the exchange of assets between China and the United States that are not put on the surface? Second, compared with ICE, CEX and LME, commodities and precious metals as real-world assets, if they can be converted into RWA products, the spot transactions, futures, options, derivatives and contracts around these assets, plus leveraged arbitrage funds, the scale of funds is also unlimited. Third, similar to the drip irrigation of the Australian Stock Exchange, global funds are looking for investment opportunities in cash cow assets. From the perspective of corporate financing needs and overseas funds chasing operating cash flow and short-term returns, this is also a large-scale demand in the RWA field.

The asset side of the RWA exchange needs to reflect the scarcity, leverage and arbitrage characteristics of the assets. From the current capital preferences, three types of RWA assets are more favorable: scarce physical assets, assets that can generate stable cash flow, and efficient productive assets. Basically, real estate has been excluded, and scarce physical assets such as AI computing power, green energy, and efficient new materials. The assets of cash cows mainly include: naturally scarce and monopolized industries, such as energy, minerals, finance, and utilities; cross-economic cycles, such as consumer goods, infrastructure or utilities; efficient materials or productive assets, such as AI computing power, high-end hardware equipment, new materials, etc. From the perspective of RWA asset tokenization, it may be more suitable for high-quality growth assets that have great potential to continuously generate stable free cash flow.

RWA Exchange focuses on incremental users and industrial users, so market participants are bound to be different from native cryptocurrency exchanges. The participants expected to be brought in by tokenization of real-world assets mainly include: physical enterprises engaged in spot transactions, similar to bill of lading and warehouse receipt transactions; asset allocation transactions, mostly fund institutions conduct macro asset allocation, but why they have to go to RWA Exchange for allocation requires the design of incentive mechanisms; quantitative arbitrage speculative trading institutions, RWA Exchange may be more suitable for trading strategies and liquidity contracts; intermediary trading service institutions, this is more complicated, and it also depends on the market expansion of RWA Exchange, which can attract more Brokers, Dealers and Makers, etc.

The multi-level layout of the RWA exchange is also critical. The foundation of the exchange is CEX+DEX, with an AMM liquidity pool, and OTC bulk transactions necessary for industrial transactions. Because it involves the tokenization of RWA assets, there must also be L2 infrastructure, a LaunchPad asset issuance/launch platform, DePIN as the real-world asset infrastructure, and NFT as a proof of equity or delivery note. There are platform tokens for platform governance, transaction incentives or liquidity, DAO+Fund for assistance, and Liquidity or Farming liquidity mechanisms.

In summary, the key to the RWA exchange lies in several aspects: the issuance of real-world assets on the chain, based on the DePIN IoT chain 3.0 and the tokenization of real-world assets; on-chain native token governance, incentives or arbitrage, which is to attract incremental intrinsic value; better promotion of structuring and liquidity, to make up for or improve the shortcomings of traditional finance or exchanges; and realization of a multi-level financing and trading market.

In terms of funds, we need to establish smooth and acceptable channels from overseas liquidity and financing markets to attract more institutional and corporate clients; design arbitrage space based on the characteristics of RWA assets, so that there is sufficient asset value space and incremental intrinsic value; combine the combined advantages of blockchain and digital assets such as NFTs, tokens and contracts to further realize the value structuring of traditional stock markets, bonds, derivatives, etc., while combining the intrinsic value incentives of native tokens; ultimately, expand the financial narrative of the RWA trading platform and the financial market value of the platform tokens, and realize an RWA industry blueprint of "DePIN + industry transactions + digital IPO (RWA asset issuance) + digital banking + digital derivatives such as industry indexes + industry/platform currencies".

Don't be too skeptical about the scale of real-world assets. Let's not talk about bulk commodities such as the Chicago Mercantile Exchange, but just talk about Shandong's electronic trading platform for agricultural products. The electronic trading platform for garlic alone is more than 20 billion yuan. This can also be regarded as an RWA model. It is based on RW transactions such as futures and spot arbitrage, spot trading, and cold storage warehouse receipts during the garlic planting cycle. The electronic trading platform (website + APP) is formed by leverage and arbitrage trading. This thing can be easily migrated to the chain, and the chain is an RWA transaction.

I have talked too much by accident, and I will talk about the economic design model of RWA Exchange when I have the chance. So, let’s think about it now: Does RWA Exchange have the opportunity to replace HKEX and become the connection point in the future multi-polarization?