Author: Shisi Jun, Shisi Jun

On October 31, the Hong Kong government released the "Policy Declaration on the Development of Virtual Assets in Hong Kong," which specifically mentioned asset-backed tokens (ABT), indicating that Hong Kong, as an international financial center, will focus on developing such virtual asset products in the future. This is indeed a positive development, and this article attempts to explore some practical issues:
Application scenarios of web3 virtual assets in Hong Kong
Characteristics and applicable scenarios of the five major Token standards

1. Background

1.1 Timeline of Hong Kong's Virtual Asset Regulatory Policies

It can be roughly divided into two periods:

• First phase: 2017-2018, mainly regulated ICO activities by the Securities and Futures Commission (SFC)
• Second phase: Late 2018 to present, regulatory thinking shifted from ICO expansion to the regulation of the entire virtual asset activity, gradually establishing a "sandbox licensing regulatory" framework

In terms of actual effects, it can be said that the sandbox licensing has hardly issued any licenses. In four years, only eight companies have been approved for crypto business licenses in Hong Kong, and currently, only two virtual asset trading platforms have successfully obtained trading licenses:

• In 2020, a license was granted to OSL, a member company of a technology group.
• In the first half of this year, Hashkey Group just obtained its license.

The participation threshold is also concentrated at the "professional investor" level, which means:

• Individual investors with financial assets of HKD 8 million or USD 1 million
• Institutional investors with financial assets of HKD 40 million or USD 5 million

The transformation occurred on October 31, 2022, during Hong Kong FinTech Week, when the Hong Kong SAR government officially published the "Policy Declaration on the Development of Virtual Assets in Hong Kong," clarifying the government's policy stance and guidelines for developing a vibrant virtual asset industry and ecosystem in Hong Kong. It specifically mentioned asset-backed tokens (ABT), indicating that Hong Kong will focus on developing such virtual asset products as an international financial center.

1.1 What is an Asset-Backed Token (ABT)?

Generally speaking, tokens are categorized into four major types, distinguished by their use and source of value.

In fact, asset-backed tokens have some overlap with security tokens. Since securities themselves are also a type of asset, tokens supported by securities rights can also be classified as asset-backed tokens.

To better distinguish between security tokens and utility tokens, let me provide an easily confused example.

The GHO stablecoin planned for issuance by the classic DeFi lending platform AAVE is considered a "utility token" rather than an "asset-backed token" because GHO will be over-collateralized based on on-chain assets, similar to DAI, rather than off-chain physical assets. Additionally, GHO and DAI can be exchanged for stablecoin transaction fee income, making them utility tokens.

Further reading:

1.3 Application Scenarios of ABT

The core of ABT is that there must be off-chain physical assets or rights as value targets. It can also be distinguished by whether it is fungible or not. Common scenarios for tokenization based on physical delivery can be simply listed as follows:

As can be seen, based on real-world mapping, there are almost applications in all aspects. The reason for applying is to combine scenarios where blockchain technology can bring better returns, thus converting the price differences of intermediaries into user benefits.

1.3 What is the Value of Tokenization?

Blockchain combined with smart contracts serves as a global state machine, synonymous with high efficiency, high liquidity, customizability, and equal participation. The comprehensive benefits are as follows:

1. Fragmentation: Refers to dividing ownership into several small pieces for the purpose of sale, making it easier to trade, price, and circulate.
2. Liquidity: Liquidity is defined by the speed at which assets can be converted into cash, with order books broadcasted and shared on-chain.
3. Cost-effectiveness: When trading based on blockchain smart contracts, external third-party costs will be eliminated or significantly reduced.
4. Automation: Blockchain-based smart contracts do not require manual interactions and have a trusted technological foundation.
5. Transparency: One of the most significant features of on-chain transactions is the immutable record preservation.

From the audience's perspective:

• For institutions, the splitting and conversion of large orders bring efficiency and cost benefits of fragmented liquidity.
• For users, having a transparent and automated trusted environment ensures their rights.

1.4 Summary

The author believes that the policy is not moving towards relaxation but is firmly making deeper attempts along the existing path.

There is no need to scoff at ABT, as anything that can bring about genuine efficiency development is an unstoppable application trend, and it will ultimately form a complementarity, just as the development of e-commerce once impacted the offline retail industry while bringing opportunities to countless individuals who embraced change. Ultimately, both physical and online e-commerce will have appropriate target audiences, achieving a combination of tactile experience and efficiency needs.

Therefore, the wind of policy in Hong Kong has begun to blow. As for how the sound of ABT will resonate, let us sort out the current Token standards on the blockchain and see which can be utilized for ABT.

2. The Five Major Token Standards

2.1 How is the Mapping of Real Assets Represented?

In the past six months, two Token standards, ERC-3475 & ERC-3525, have been successively approved, providing a more reasonable expression for the application scenarios that previously relied on a mix of ERC20 and ERC721.

We can compare the types of assets in the real world to the limitations of previous standards (ERC20/721/1155).

The limitations are indeed significant.

It can be seen that scenarios closely related to contracts, bonds, and real finance are all in a state of being replaced by ERC-20/721.

Previously, the application of contract-type assets (such as the real mapping of real estate contracts and investment financing contracts) required various combinations when using replacement standards, where one contract = ownership rights + size of rights + stipulations of rights.

• Regarding ownership rights: Various lands rely on ERC-721 IDs for confirmation, such as plots in the otherside game.
• Regarding the size of rights: It relies on ERC-20 for quantity management, such as the governance Token of aave, which varies voting rights based on shares.
• Regarding stipulations of rights: It relies solely on off-chain documents or various textual descriptions in Ipfs, which are difficult to unify in URI data.

Therefore, although using ERC-20/721/1155 can replace certain conventional applications of contracts and bonds, having "standards" is necessary to end the chaotic situation of differing opinions.

2.2 Overview Comparison of the Five Major Token Standards

Let’s use a diagram to compare and summarize as follows:

Link can be found in the appendix at the end.

ABT is likely to comprehensively apply the above five Token standards to design the mapping relationship between assets and reality according to local conditions. Each standard has its advantages and disadvantages.

2.3 Conventional ERC Standards (20, 721, 1155)

Further reading of past interpretative articles:

• NFT Standards: 【Source Code Interpretation】What exactly is the NFT you bought?
• The Pioneer of NFTs: 【Contract Interpretation】CryptoPunk, the world's earliest decentralized NFT trading market
• NFT Leasing: 【Source Code Interpretation】How does Ethereum's new standard EIP-4907 achieve NFT leasing?
• ERC1155 Standard: NFT Leasing Proposal EIP-5006 enters final review! Making blockchain transformation of large overseas games possible
• ERC1155 Applications: 【Decode】How can NFTs created for free on OpenSea appear in my wallet without being on-chain?

2.4 Comparison of ERC-3525 and ERC-3475

Further reading: Web3 Bond Standard Debate: A Comparative Study of ERC-3475 and ERC-3525

2.4.1 Core Logic of ERC-3475

Starting from the structure of its stored data, let’s illustrate with an example of developing a debt contract using 3475.

In 3475, each debt contract is a Class 0, and one contract can issue multiple contracts, similar to NFT IDs. Each class manages multiple data, recording textual information such as the contract's name, abbreviation, description, etc. Each piece of information can further break down into types and values, such as contract amount, contract time, deliverer, delivery item, notary institution unit, business license number, etc.

In fact, ERC-3475 is a highly customizable standard set that can support almost any information representation. Its main achievement is optimizing how to better save Gas and support conventional functions like batch transfers under such highly customizable on-chain storage contracts. It is similar to 4907 in that it only defines the data protocol without managing the delivery amounts or imposing restrictions on storage leasing. It merely defines a comprehensive type that allows anyone to issue a standard contract.

Its characteristics can be summarized as:

• A standard specifically defined for contracts, with decentralized on-chain storage.
• Highly optimized storage and on-chain transfer costs, making it easy to expand debt relationship transfers like AMM.

2.4.2 Core Logic of ERC-3525

ERC-3525 is highly similar to ERC-1155 but introduces a new concept called slot.

If ERC-1155 is address → ID → quantity, then ERC-3525 allows each ID to be wrapped in a layer of relationship called Slot. For example, when issuing Token 1 and Token 2, they can be set as a Slot named: Jay Chou's autograph, which gives these NFTs a different significance compared to others like 3, 4, and 5.

Thus, 3525 is Slot → ID → (quantity, holding address), where the address is merely an attribute under the ID.

Applied to bonds, as shown in the figure: Slot is the asset name, which has multiple IDs under it.

• Asset (Asset Name): SOLV Vestion Voucher
• Face Value: 2400.00
• Voucher ID: #2400
• Vesting Period: Starts on 2021/12/24 and ends on 2021/12/24
• Vesting Curve: Vesting yield calculation interest rate and other curve functions

The ERC-3525 standard also provides multiple transfer methods and optimizes Gas consumption, allowing traditional bond transactions on-chain to be smoother.

2.5 How to Evaluate ERC-3525 and ERC-3475?

• ERC-3525 focuses on the management of semi-fungible tokens, improving the numerical aspects of asset combination and splitting, and can be considered a high-quality standard for traditional financial assets on-chain.
• ERC-3475 emphasizes the definition of semi-fungible tokens, providing more standardized definitions for contracts with lower standardization, and can be considered a high-quality standard for traditional commercial agreements on-chain.

The author also believes that the ERC-3525 standard may not only play a role in bonds but is also needed in GameFi, where it is far more powerful than ERC-1155. Currently, many blockchain games are essentially mining games, and SFT can embed game logic into the items themselves, enhancing the playability of the game. It will likely be the preferred standard for large AAA games in two years.

3. Conclusion

• Are the five major Token standards sufficient to support Hong Kong's Web3 pilot reforms?

Reflecting on the logic of this article, by sorting out the historical policy timeline of Hong Kong and analyzing the current policy focus on ABT, we examined its application scenarios and value points in conjunction with the blockchain, and then reviewed the current mainstream five major Token standards, where the two newly introduced standards can easily play their core value in debt bonds and commercial order contract scenarios.

• How can we prove that these standards can truly deliver value?

It's simple; on-chain financial pilots are already being conducted with real money.

On October 24, the decentralized bond trading and DeFi market-making platform D/Bond officially announced a partnership with Brazilian fintech company a55 to issue on-chain bonds worth $50 million that comply with regulatory rules. These on-chain bonds will be issued through the ERC-3475 standard and have been registered with the Brazilian Securities and Exchange Commission (CVM).

In fact, the mapping and integration of off-chain assets on-chain can break the current limitations of DeFi.

DeFi has always been a pawnshop mentality, where the core model calculates the loan scale through over-collateralization. Regardless of how the constant accumulation curve is used to calculate exchange value or how dynamic interest rates are used to derive deposit and loan yields, it is essentially an economic internal circulation. Under the pawnshop mentality of over-collateralization, it further hinders the application and amplification of financial value.

The application of new Token standards allows Tokens to have stronger processing capabilities on financial securities contracts, not only defining interest rates, amounts, and delivery terms but also optimizing gas costs, making it easy to merge, split, and resell batches of bonds of the same grade.

• From the perspective of institutional economics, how do we view the value of Web3?

Web3 is a new economic infrastructure for coordination and exchange. It fundamentally starts with property rights systems, shifting trust in complex systems from individual organizations to decentralized nodes and verifiable code. It has unique economic characteristics that make it possible to complement and, in some cases, directly compete with existing mechanisms.

Smart contracts are contracts guaranteed to be automatically executed by code. With the segmentation and improvement of property rights systems, many components of economic activities, including repetitive mechanical parts in production and transactions, computational rules, and order, may be replaced by machines and smart contracts.

Its core value is trust & freedom. Based on these two foundations, smart contracts build a new system with verifiable code, transferring the subject of trust and shifting trust in complex systems from individual organizations to decentralized nodes and verifiable code.

Regulation and technology are not inherently contradictory; there are points of convergence.

The two major powers in the world have chosen different directions in this field. We have chosen to empower hardware entities through the metaverse, while the United States has chosen to pursue software creation through Web3.0. The direction also determines the policy. I believe that in the near future, more applications will see the value of combining trusted blockchain technology with the ABT pilot in Hong Kong.