In the current situation where the East and West do not engage with each other, it seems that there is only one concept in the entire cryptocurrency market that everyone can agree upon: RWA (Real World Assets).

High-Risk Low-Configuration “RWA”

For various reasons, many Web3 entrepreneurs are attracted to the opportunity to use blockchain technology to tokenize physical assets, such as real estate and artwork, through issuing tokens or NFTs for financing. However, things are often not as simple as they seem. Recently, the criminal team at Mankun Law Firm handled a criminal case involving an RWA project, with attorney Liu Honglin deeply involved in the service process. In retrospect, I believe this case is quite representative. To protect the privacy of the parties involved, Attorney Honglin has partially fictionalized and blurred the details of the case for discussion purposes only, and it should not be taken literally. This provides an opportunity to discuss the potential legal risks faced by RWA projects due to inadequate risk prevention, hoping that entrepreneurs can navigate around these pitfalls.

The story outlines the situation of an entrepreneur who aimed to revitalize a real estate project through the RWA model. The plan was to use the future revenue of the property as collateral to issue NFTs via blockchain technology, which would then be sold directly to individual customers online. Investors who purchased these NFTs would share in the property’s revenue rights. Initially, the project was well-promoted, and the seemingly secure returns from the real estate attracted many users, leading to impressive sales in a short time.

However, the initial success did not last. Due to a continuing local economic downturn, the operating income from the property fell far below expectations. As company executives began to use their personal funds to cover losses, the project ultimately declared failure. Early investors, especially those who bought at high prices in the secondary market, became dissatisfied and organized various forms of rights protection and complaints, eventually leading to criminal investigations by local police.

This story conveys a fundamental lesson: even with real-world assets like real estate as collateral, and without fabricating facts or concealing truths, it does not guarantee immunity from legal risks.

Real Asset Collateral ≠ Legal Risk Immunity

In an environment where many local governments encourage the use of virtual means to promote real assets, some entrepreneurs believe that as long as their issued NFTs are backed by real assets, everything will be fine. However, they fail to realize that while asset backing can enhance the project’s credibility, it cannot replace the need for robust operational capabilities and cannot fully eliminate risks in operations.

From our practical experience, many RWA projects encounter issues because the project teams focus solely on how to leverage asset backing to issue tokens, neglecting the importance of sustained operational capacity. When market conditions fall short of expectations and project teams fail to fulfill their commitments to investors, they may face accusations of false advertising at best, or even criminal charges at worst.

As a Web3 business compliance lawyer, Attorney Honglin understands that many entrepreneurs start their projects with good intentions and are not looking to simply make a quick profit. However, risk-taking entrepreneurs often have overly optimistic expectations about future returns and may overlook market uncertainties. When the market declines or operational difficulties arise, the project’s anticipated profits may not materialize, leading to subsequent legal issues.

Avoiding legal pitfalls in RWA projects

Globally, the concept of RWA is still in the exploratory stage, with varying legal definitions and regulatory approaches across different countries. Many entrepreneurs, seeing the successful development of overseas RWA projects, are eager to follow similar models domestically but often overlook the legal environment in China. The regulation of virtual currencies in mainland China has always been very strict, with virtual currency trading, financing, and related activities considered high-risk areas. Many projects initially focus on the rapid financing effects brought by token issuance while ignoring the underlying regulatory requirements. Once a project crosses the red line of virtual currency regulations, it may face not only user complaints or civil lawsuits but also criminal penalties.

For Web3 entrepreneurs looking to avoid pitfalls in the RWA space, Attorney Honglin offers three practical suggestions:

1Do not adopt a “hit and run” mentality: RWA projects are not a quick path to financing. Many entrepreneurs are eager for short-term gains, thinking they can rapidly finance by issuing tokens. This “hit and run” mentality is very dangerous, especially in an unstable market. If the project fails to deliver promised returns, investors will quickly shift to complaints and reporting to authorities. Entrepreneurship is a long-term endeavor that requires sustained operation; don’t expect to make all the money in one go.

2Separate the funds: Do not misuse investors’ money. Many projects, after early-stage financing, casually misappropriate investors’ funds for other project developments or even engage in cryptocurrency speculation. Such actions not only easily provoke investor dissatisfaction but can also be viewed by law enforcement as fundraising fraud. Ensuring the separation of the project’s fund pool from operational funds and maintaining transparency in fund usage is the most basic principle of fund management.

3Actual operations are more important than technical concepts: Whether it’s blockchain, RWA, or NFTs, entrepreneurs must remember one thing: regardless of how cool the technology is, the success of the project ultimately depends on its operation. Investors care about whether you can continuously generate returns, while consumers want stable products and services, not just the latest technology. If your business logic is unclear and your operational capability lags, even the most advanced technology will likely not lead to success. Focus on solid operations and don’t get trapped by technical concepts; this is the key to long-term survival.

Mankun Lawyer’s Summary

RWA projects may appear to offer Web3 entrepreneurs a new pathway, but they are still somewhat underdeveloped at this stage. As we navigate these uncertain waters, simply having asset backing does not grant immunity from legal risks. In mainland China, any tokenization and financing activities involving assets must be approached with extreme caution. If you are uncertain about the criminal risks associated with your Web3 project, it is advisable to consult an experienced lawyer to ensure proper oversight and guidance.

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