Will RWA be the next decisive opportunity for Binance and OKX?

Author: Ye Kai, Mankun Blockchain Legal Services

Articles are often long and tedious, and sometimes once the topic of RWA exchanges is brought up, it becomes hard to stop. Since the Hong Kong Web3 conference last year, some big names have been eager to set up exchanges together. At that time, I wasn't optimistic about the licensed compliance in Hong Kong, but instead researched the regional markets in Dubai and South America and the potential of RWA vertical exchanges; of course, I also visited many friends in various exchanges to learn more about the ecosystem of cryptocurrency exchanges, especially the gray wash industry, as well as the core operational community and investment flow. Several friends rushed to submit their license applications before the deadline at the end of March this year, but I wasn't optimistic about the licensed applications in Hong Kong or the subsequent Bitcoin ETF. As expected, in recent days, several applications for license number 7 in Hong Kong have been withdrawn, and I believe more institutions will follow suit.

Setting aside the U.S. actions against certain exchanges, offshore exchanges like Binance, OKX, and Huobi have seen various tokens flying around without anyone picking them up; meanwhile, the licensed exchange HashKey (Hong Kong station) has compliance but no trading volume or liquidity. The international station only saw some trading volume after launch, but most of it is still just a slice of the existing cryptocurrency market. In this chaotic situation, is there a new opportunity?

01 The Next Opportunity for Exchanges

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

Those in the know understand that native cryptocurrency exchanges are already very mature, especially the series of exchanges dominated by Chinese users, represented by Binance, OKX, and Huobi. In terms of trading scale, if Binance doesn't face a self-destructive issue like Huobi, OKX basically has no chance of surpassing it, and second-tier exchanges like KuCoin and Gate find it difficult to surpass or disrupt the leading exchanges.

Creating a new offshore exchange is also quite challenging because this model is already very mature, relying on the gray wash industry, similar to a casino, where the main community and investment marketing techniques are played out by the same people using the same methods. It's just a difference of fifty steps versus a hundred steps. Starting another one may slice a small cake, but it's hard to surpass.

The licensed exchanges in Hong Kong are a false proposition; the regulatory bodies are still those financial veterans. The so-called innovative products like STO securities tokens and Bitcoin spot ETFs are still the traditional financial institutions' vested interests, with the Hong Kong Stock Exchange acting as an intermediary to divide the cake, making it impossible to truly hand over power to the new forces of Web3.

The new track of Web3 wallets has been pursued by OKX and Binance for a long time, but products like inscriptions and memecoins have only been hot for a while without sustaining, lacking long cycles and trading volume. Even BTC core has been concerned about inscriptions, and relying on this to support a large new ecosystem is nearly impossible.

In contrast, the Bitcoin spot ETF in the U.S. is much more robust than Hong Kong's Bitcoin spot ETF. The key takeaway from the American Bitcoin ETF is that if you want to grow, you need to consider the old money and incremental users in the real world.

Overall, Binance and OKX have already rolled up enough in the existing cryptocurrency market. Their only opportunity is not in the Web3 wallets and new memecoins they've been toiling over, but in the RWA (and DePIN) exchanges/tracks for the tokenization of real-world assets.

02 RAW or the Game Point?

Is the next decisive opportunity for Binance and OKX in RAW?

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

In my first RWA article, I listed some figures regarding real-world assets, using 2020 global currency and market data as a reference (in USD): 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) ~ 1000 trillion (high), not including emerging assets like AI computing power and renewable energy.

When we think about the incremental market: what is the core reason for this round of BTC's price increase? Most would think of the Bitcoin spot ETF. What is the core essence of an ETF? It's a connecting product between the real world and Bitcoin; it is a typical RWA model product, traded on exchanges like the NYSE, Chicago, and NASDAQ, while Bitcoin spot trading is captured by Coinbase, directly bringing in hundreds of billions of dollars, with daily incremental trading volume approaching four to five billion dollars.

Currently, the only largest incremental market is 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, where mainstream real-world assets and funds are held by enterprises and institutions. Moreover, RWA products allow incremental novice users to participate without needing complex digital wallets; they can use conventional credit cards or pension accounts on traditional exchanges, with RWA tokens or digital assets having professional custody and trading platforms.

Returning to the Bitcoin spot ETF, aside from U.S. listed companies, the funds and institutions following the ETF, including banks and pension funds piloting investments, you only need to analyze one thing: look at the proportion of Bitcoin ETF in their investment allocation and the classification of assets before they came in, and you'll understand the vast potential behind RWA assets.

Speaking of real-world assets, RWA exchanges cannot be separated from DePIN.

The combination of RWA and DePIN is an effective representation or anchoring of real-world assets. DePIN is the infrastructure for issuing real-world assets on-chain, essentially the 3.0+ asset tokenization of the Internet of Things (IoT). Leading exchanges have long had DePIN tracks, but looking at the current DePIN projects, if we consider WiFi or data-sharing projects, it's hard to directly generate cash flow value; however, as the infrastructure for issuing RWA assets, it can directly generate RWA token value during the asset issuance and trading process, and this RWA token cash flow can further combine into RWA products.

In the realm of real-world assets, the combination of DePIN with DAO and smart contract SPVs, as well as crypto funds (token dividends or liquidity), can make RWA asset issuance and anchoring more on-chain and more native (the implementation model is complex enough to warrant a detailed discussion in another article).

So let's clarify:

The leading offshore exchanges like Binance, OKX, and Huobi are all native token exchanges, starting from the early ICOs and contracts, growing to occupy the first tier; the target customer base of offshore exchanges is primarily retail traders.

Coinbase in the U.S. is somewhat half-offshore and half-licensed. When Binance was constrained by the U.S. and through the Bitcoin spot ETF, it smoothly captured this wave of massive traffic; Coinbase's customer base is quite complex, with institutional clients brought in by the ETF in addition to retail traders.

The licensed exchange HashKey (Hong Kong station) focuses on compliance, mainstream tokens, and securitized tokens, primarily serving PI clients, with many restrictions on retail traders, resulting in overall low trading volume, most of which is non-crypto-based, especially focusing on compliant deposits and withdrawals.

There's also the Hong Kong Stock Exchange, which, despite the decline in trading volume, has seized the dominant position of the Hong Kong Bitcoin spot ETF through conservative regulation, bringing along a group of brokerage intermediaries to share the profits. I seriously suspect that STOs will follow the same path; the target customer base of the Hong Kong Stock Exchange is mostly institutional clients and PI investors, essentially traditional investors and investment institutions trading Bitcoin concept stocks.

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

We should seriously consider: is the RWA exchange the only opportunity to attract old money between offshore exchanges and licensed exchanges using real-world assets?

03 Core Keys of RAW Exchanges

Although the market space for RWA is vast, bridging or connecting the real world and the crypto world greatly requires correct advocacy, knowledge dissemination, professional education, and consulting incubation, investment advisory, etc. The future popularization of real-world asset tokenization involves a lot of migration, uplift, as well as trading and delivery, making RWA exchanges and their ecological institutions crucial.

However, the current licensed exchanges and many that claim to be RWA exchanges or RWA asset protocols have basically only solved the asset issuance issue, such as STO asset protocols, NFT certificate models, or the standards and processes for STO asset tokenization, which come to a halt once tokenization goes live. Practitioners have yet to resolve four key issues: market structure, market participants (2B and 2C), native tokens, and liquidity.

From the RWA perspective, drawing on the experience of traditional exchanges, the market structure of an exchange is quite complex, involving the trading assets and funds on both ends, trading methods, classification of market participants, and the layout of different levels of trading channels in the exchange.

RWA exchanges must first analyze the funding strategy. Firstly, compared to the uniqueness of Hong Kong stocks regarding the funds for asset exchange between China and the U.S., the decoupling between China and the U.S. has led to a decline in the liquidity of the Hong Kong Stock Exchange. However, from the RWA perspective, can we accommodate these not-so-visible funds for asset exchange between China and the U.S.? Secondly, comparing ICE, CEX, and LME, as bulk commodities and precious metals of real-world assets, if they can be transformed into RWA products, surrounding these assets with spot trading, futures, options, derivatives, and contracts, along with leveraged arbitrage funds, the scale of funds could be limitless. Thirdly, similar to drip irrigation to the Australian Stock Exchange, global funds are searching for investment opportunities in cash cow assets. From the perspective of corporate financing needs and overseas funds pursuing operational cash flow and short-term returns, this also represents a large-scale demand in the RWA field.

The asset side of RWA exchanges needs to reflect the characteristics of asset scarcity, leverage, and arbitrage. Based on current funding preferences, three types of RWA assets are particularly favorable: scarce physical assets, assets that can generate stable cash flow, and efficient productive assets. Real estate has basically been excluded; scarce physical assets include AI computing power, green energy, and efficient new materials. Cash cow assets mainly include: naturally scarce and monopolistic industries, such as energy, minerals, finance, and utilities; cross-economic cycle assets, such as consumer goods, infrastructure, or utilities; and efficient materials or productive assets, such as AI computing power, high-end hardware, and new materials. From the perspective of RWA asset tokenization, it may be more suitable for high-quality growth assets with significant potential to continuously generate stable free cash flow.

RWA exchanges focus on incremental users and industrial users, so market participants will inevitably differ from those in native cryptocurrency exchanges. The expected participants brought in by real-world asset tokenization mainly include: physical enterprises engaged in spot trading, similar to delivery orders and warehouse receipts; asset allocation trading, mostly conducted by fund institutions for macro asset allocation, but the incentive mechanism for why they should come to RWA exchanges for allocation needs to be well designed; speculative trading institutions engaged in quantitative arbitrage, where RWA exchanges may be more suitable for trading strategies and liquidity contracts; and intermediary trading service institutions, which is more complex and depends on the market expansion of RWA exchanges to attract more brokers, dealers, and makers.

The multi-layered layout of RWA exchanges is also crucial. The foundation of the exchange is CEX + DEX, with AMM liquidity pools, and it also needs to have OTC bulk trading essential for industrial transactions. Since it involves RWA asset tokenization, it also requires L2 infrastructure, a LaunchPad asset issuance/platform, and DePIN as the infrastructure for real-world assets. It can also have NFTs as rights certificates or delivery order certificates, platform tokens for governance, trading incentives, or liquidity, DAO + Fund for assistance, and liquidity or farming mechanisms.

In summary, the key aspects of RWA exchanges include: issuing real-world assets on-chain, based on DePIN IoT's 3.0 and the tokenization of real-world assets; on-chain native token governance, incentives, or arbitrage, which attract incremental intrinsic value; better facilitation of structured and liquid markets, addressing or improving the shortcomings of traditional finance or exchanges; and achieving multi-layered financing and trading markets.

In terms of funding, it is essential to establish smooth and acceptable channels from overseas liquidity and financing markets to attract more institutional and corporate clients; design arbitrage spaces based on RWA asset characteristics, ensuring sufficient asset value space and incremental intrinsic value; combine the advantages of blockchain and digital assets like NFTs, tokens, and contracts to further realize the value structuring of traditional stock markets, bonds, derivatives, etc., while integrating the intrinsic value incentives of native tokens; ultimately, expand the financial narrative of the RWA trading platform and the financial market value of platform tokens, achieving an RWA industrial blueprint of "DePIN + industrial trading + digital IPO (RWA asset issuance) + digital banking + digital derivatives like industrial indices + industrial/platform currencies."

Do not underestimate the scale of real-world assets. Without mentioning large commodities like those on the CME, just take the electronic trading platform for agricultural products in Shandong, where the electronic trading volume for garlic exceeds 20 billion RMB. This can also be considered an RWA model, based on the garlic planting cycle's futures arbitrage, spot trading, and cold storage warehouse receipts, leveraged and arbitraged to form an electronic trading platform (website + app). This can easily be migrated on-chain, and going on-chain is RWA trading.

I’ve rambled on again, and there’s so much more to discuss regarding the economic design model of RWA exchanges. So, for now, think about this: Is there an opportunity for RWA exchanges to replace the Hong Kong Stock Exchange as a connecting point in the future multipolar landscape?