jakiro
Author: Zhang Feng
Level 4: Substantial violation of financial regulatory risks—systemic risks and regulatory arbitrage
This level of risk has touched the core bottom line of financial supervision, and is mainly manifested in the possibility of triggering systemic risks, conducting regulatory arbitrage, and undermining financial market stability.If RWA business converts illiquid assets into liquid assets on a large scale through tokenization without setting up a corresponding risk management mechanism, it may become a new channel for risk transmission; if regulatory differences in different jurisdictions are used for arbitrage, it will undermine the overall effectiveness of financial supervision.
From the perspective of macro-prudential supervision, RWA business may cause systemic risks in two ways: first, through the liquidity conversion function, illiquid assets are converted into liquid tokens, forming maturity conversion risks similar to those of traditional banks; second, through the interconnection effect, crypto market risks are transmitted to traditional financial markets.The China Financial Stability Report issued by the Central Bank of China has clearly stated that the increased correlation between crypto assets and the traditional financial system may bring about risk transmission, which requires RWA business to establish an effective risk isolation mechanism.
Problems such as capital pooling, self-financing, and high leverage that emerged in the later stages of the P2P industry have essentially evolved into a shadow banking system, posing a threat to financial stability.RWA practitioners must take institutional measures in advance, such as establishing a risk firewall with the traditional financial system, participating in regulatory sandbox testing, and designing a business structure with built-in risk control to avoid negative impacts on the stability of the financial system.Especially in the business model design stage, a comprehensive systemic risk assessment should be conducted to ensure that a single business failure will not trigger a chain reaction.
Level 5: Basic business model illegal risks – legal qualitative misalignment and fundamental conflicts
This is the lowest risk, which means that the business model itself is in fundamental conflict with the existing legal system.If the RWA business is determined to be the unauthorized taking of public deposits, issuance of securities or insurance business, and it is unable to meet the substantive requirements of relevant laws, the entire business model will face fundamental challenges.
From a legal qualitative perspective, the criminal risks that RWA business may involve include the crime of establishing a financial institution without authorization in Article 174 of the Criminal Law, the crime of illegally absorbing public deposits in Article 176, and the crime of fund-raising fraud in Article 192 of the Criminal Law.Especially in the current regulatory environment, if you conduct financing activities through tokenization, it can easily be identified as “substantively engaged in financial business”, which will trigger relevant criminal provisions.The “Decision on Amending the Interpretation of Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases of Illegal Fund-raising” issued by the Supreme People’s Court of China in 2023 further clarified the legal boundaries of various new financing activities and provided important legal reference for RWA business.
The final classification of the P2P industry as “illegal fund-raising” shows that if the business model is contrary to the essence of financial laws, no matter how innovative the packaging is, it will be difficult to avoid legality challenges.RWA practitioners should conduct a thorough legal qualitative analysis in the early stages of business design, and must decisively adjust or abandon business directions that may constitute illegal basic models.Especially in the process of business innovation, the principle of “same business, same risks, same rules” should be adhered to, and avoid circumventing substantive supervision through technical packaging.
4. Classified and hierarchical compliance strategy: integrated response of technology, finance and law
Faced with multi-level risks, RWA practitioners need to adopt a classified and hierarchical compliance strategy to achieve an organic integration of technological capabilities, financial logic and legal rules.This integration is not only reflected at the technical application level, but also requires the construction of a compliance ecosystem that integrates institutions, technology, and law.
(1) Civil dispute level: institutionalized response
Establish a dispute prevention mechanism driven by “technology + contract”.Technically, formal verification is used to ensure the security of smart contracts, and a decentralized arbitration mechanism is introduced to handle on-chain disputes; legally, legal documents with clear rights and responsibilities are designed to clarify the distribution of responsibilities and resolution paths in various situations.By embedding the dispute resolution mechanism into business design, dispute resolution costs are reduced and user experience is maintained.
Specifically, dispute resolution clauses can be embedded in smart contracts to agree on arbitration triggering conditions under specific circumstances; blockchain Oracles technology can be used to introduce external legal fact determination; and a multi-signature mechanism can be designed to deal with abnormal contract execution.At the same time, the corresponding relationship between on-chain operations and offline rights and interests is clarified through legal documents to avoid unclear legal relationships due to technical features.This integrated solution of “code is law” and “law is code” is the basic guarantee for RWA business compliance.
(2) Administrative procedural violations: proactively embrace supervision
Adopt a proactive compliance strategy of “communication + adaptation”.Actively communicate business models with regulatory agencies and participate in regulatory sandbox projects; establish a cross-jurisdictional compliance monitoring system to track global regulatory developments in real time; design modular compliance plans to quickly adapt to procedural requirements in different jurisdictions.Reduce operational risk by productizing compliance procedures.
In practice, we can learn from the compliance management experience of traditional financial institutions and establish a dedicated regulatory relationship management team; participate in industry self-regulatory organizations to jointly formulate technical standards and business specifications; use RegTech (regulatory technology) solutions to automatically complete regulatory reporting and information disclosure.Especially in cross-border business, a compliance strategy of “home country supervision + host country adaptation” should be adopted to ensure global consistency of business and meet special local requirements.
(3) Administrative substantive violations: technical and legal collaborative prevention
Build a three-dimensional defense system of “regulatory technology + compliance design”.Use blockchain to achieve transparency and real-time monitoring of asset flows; identify abnormal transaction patterns through big data analysis; code investor suitability requirements to ensure that business execution meets substantive regulatory requirements.At the same time, compliance concepts should be deeply integrated into product design rather than remedial measures after the fact.
Specific measures include: deploying on-chain analysis tools to monitor large abnormal transactions; establishing a dynamic risk assessment model to adjust business parameters in real time; and achieving “selective transparency” through technologies such as zero-knowledge proofs, which not only protects commercial privacy but also meets regulatory needs.In terms of investor protection, automated suitability management can be achieved through smart contracts, such as setting investment limits and risk exposures for investors of different levels.
(4) Substantial violation of financial supervision: institutional risk isolation
Design a system importance response mechanism of “risk buffering + business layering”.For businesses that may be systemically important, establish a risk firewall with the traditional financial system; isolate high-risk links through business spin-offs; introduce traditional financial institutions as specific roles to share systemic risks.Through mechanism design, ensure that business innovation does not endanger financial stability.
Specific options that can be adopted include: setting up independent entities to operate high-risk businesses to avoid risk contagion; transferring some risks through reinsurance mechanisms; introducing stress testing and scenario analysis to assess risk tolerance under extreme circumstances.Especially in terms of liquidity risk management, a liquidity reserve system similar to traditional finance should be established to prevent run risks.
(5) Basic model illegality: bottom-line thinking and forward-looking adjustments
Adhere to the bottom-line compliance principle of “legal qualification first + continuous monitoring”.Conduct in-depth legal substantive judgments before business innovation to avoid touching legal red lines; establish a regular legal re-evaluation mechanism to adjust business direction according to regulatory trends; adopt conservative strategies or seek clear legal opinions for ambiguous areas.Adhering to the legal bottom line is the prerequisite for sustainable development.
In specific practice, a compliance committee composed of internal legal affairs, external lawyers, and industry experts should be established to conduct pre-reviews of innovative businesses; conduct regular compliance audits and risk assessments; pay close attention to legislative developments and regulatory cases, and adjust business strategies in a timely manner.Especially before the business is scaled up, authoritative legal opinions should be obtained to clarify the legal characterization and compliance requirements of the business.
5. Conclusion: Finding a balance between innovation and compliance
As a fusion product of “technology + finance + law”, the healthy development of RWA encryption business relies on the coordinated compliance with the three types of rules.From the lessons of P2P, we see that “innovation” that ignores the nature of finance and legal rules will eventually pay a price; from the opportunities of RWA, we see that only businesses that incorporate technological innovation into the compliance framework have long-term value.
Practitioners should abandon the fluke mentality of “development first and compliance later”, establish a classified and graded risk identification and response system, and adopt differentiated strategies at different risk levels.Only by finding a balance between innovation passion and compliance rationality can RWA encryption business avoid repeating the mistakes of P2P and truly unleash its huge potential to transform traditional finance.
In an era of accelerated integration of digital assets and the real world, those practitioners who can organically combine technological capabilities, financial logic and legal wisdom will not only gain an advantage in the competition, but will also contribute to building a safer, more efficient and inclusive financial ecosystem.Compliance is not the opposite of innovation, but the cornerstone of sustainable development of innovation – this is the most valuable revelation left to us by the P2P regulatory storm, and it is also the path that RWA encryption business must follow to mature.With the development of China’s digital economy and the opening of the financial market, RWA business is expected to become a bridge connecting traditional finance and the digital economy under an effective regulatory framework. However, the realization of this vision depends entirely on the compliance choices and strategic vision of practitioners today.
