Tokenisation in China Life Sciences: Opportunities & Challenges

[MUSIC] We'll be covering the topic on tokenization in China life sciences, opportunities and challenges. Before we begin, just a few housekeeping notes. For those claiming Hong Kong's CPD points, please ensure that you're logged in using the full name as stated on your Hong Kong practicing certificate. And that you remain logged in for the entire session. Let's get started with today's topic. First of all, let me introduce myself and my co-parner. My name is Richard Lee. I'm a partner, having the firm's health care and life sciences practice in Guida, China. I'm delighted to be joined today by my co-parner, Karen Lam, who is our head of securitization and derit phase Hong Kong. You might be wondering why we have chosen to focus specifically on tokenization and real world assets in the China life sciences sector today with recent developments in both the life sciences industry in China. And our RWA space where seeing an emerging trend of businesses starting to explore opportunities in this area. So let me begin by providing you some high level background to set a stage. As some of you might be aware, China has established over the past decade a comprehensive and efficient life sciences innovation infrastructure. And therefore, transition from traditional generics manufacturing into global life sciences innovation ecosystem. This observation is backed by a series of data points, including number one, according to industry reports, companies that are now developing nearly one-third of the world's total drug pipeline. As a result, China has risen to become the second largest player global in this regard. And number two, clinical trial and new stars by China had quoted the companies have risen from 3% of the global total a decade ago to nearly one-third today. With the rapid growth of the R&D capability in China, we now have seen a significant surge in the value of China assets in life sciences sector. So this is backed by the recent transactional data point. For instance, according to major media for transactions with multinational big farmers globally, with at least 50 million US dollars of employment, the share of deals involving China assets has increased over the past 10 years, reaching nearly one-third this year. The last point we want to make is that while we have seen the capital markets in the greater China are coming back for volatile companies with a huge demand of funding to support innovation in many companies, whether public or private companies are still looking for different sources of funding in addition to the equity markets. So with the recent development around the world, tokenization and RWA present an alternative funding source for the parties. So interestingly, in the last several months, we have seen two pioneering cases that were publicly announced in this area. One is the IVD medical and the other is the high bio pharmaceutical. The most recent development with respect to the IVD medical case is that the company had signed a strategic collaboration agreement with another public biotech company called Transenta. In this month, sorry, in September 2025, to explore the tokenization of Transenta six core innovative pipelines, valued at over 1.5 billion US dollars. With that, I'd like to turn over to my co-founder, Karen. Hi, Karen. Hi, Richard. Thank you. And so I will continue to talk about some of the commercial drivers about why life science companies are looking at tokenization as a potential way to raise funding. And in order to understand that, I think we will need to go through some of the key concepts in relation to the tokenization technology for some of us here who may not be familiar with the concepts. And then we'll delve into more detail about how these concepts can be applied in a life science context. And Richard and I will go through the case study for that. And then finally, we will look at some of the legal and regulatory issues relating to this type of potential structures. So you may wonder why there is this hype in relation to tokenization and applying that in relation to the life science sector. And a lot of you may also be aware that recently, there have been a lot of innovations using blockchain-based solutions to tokenize a number of different assets. And in Hong Kong, we have seen the Hong Kong government issue the digital bonds. And recently, there have also been tokenized funds, including money market funds that have been sold to investors. But token-based solutions can be used for other assets as well. And since I think bonds and bonds have been much talked about today, we're looking at some of the more interesting asset classes, including IP assets involved in life science sector. Common benefits that people have cited for tokenizing these various assets include potential operational efficiencies and cost saving, transparency and faster settlement. And I think particularly in the life science sector, given a lot of these IP and life science assets are fairly iniquit and don't have a easily accessible market for investors. So tokenization can potentially also bring benefit by improving liquidity, helping the asset owners to monetize the value for these assets. And it also offers the potential to fractionalize these assets so that they can be broken up into smaller units that can be acquired by different investors. So these are some of the potential benefits and why people are looking at tokenization as a potential way for life science sector to raise financing. So before we move on to the more detailed structure, we'll cover some of the key concepts relating to tokenization. You may be aware that there are crypto assets, such as Bitcoin, Ether and Stanglecoins and other types of crypto-native assets. These are assets that only exist in the blockchain. But today we're going to focus on what we call security or asset tokens, which are tokens that give the owner or holder rights to certain real-world assets. And in this case today, life science sector assets. And in order to acquire these asset tokens, you also need a cash settlement leg. And in this case, we may have cash tokens involved as well. So the focus today will be in relation to digital assets in the right side of the diagram that you can see on screen. More about tokenization and the technology behind it. So tokenization is based on the distributed ledger technology DLT and commonly described as blockchain. And it offers a new way of recording data and transactions between participants in a network that consists of different servers and nodes that maintain a separate copy of the ledger. And the beauty of it is that anyone can join a public or permissionless DLT network and become a participant. And the tokens that are created within the DLT network are essentially records of different balances and transactions within that network. And these can be instantly accessible by participants within the network allowing for the efficiency and transparency that we mentioned just now as part of the commercial drivers. So I think another interesting part about blockchain is the immutable nature of the records on chain transactions that happen on blockchain need to be validated by way of the blockchain networks consensus mechanism before they can be recorded. And then once the transaction is recorded on the blockchain then there are many previous transactions that make alteration of the records impossible practically. And this creates the immutable record nature of the blockchain transactions and thus provide the security in terms of these transactions. In terms of how the owners of tokens hold the underlying asset the tokens that are created on the blockchain would be recorded against a specific blockchain address. So investors who hold life science assets through tokenization technology would need to have a blockchain wallet in order to hold these tokens. And there would be a private key as well as a public key attributed to that address. For people who do not have access to the blockchain directly and have a wallet on chain they may also hold through various custodians. And finally another attraction of having transactions done on blockchain is because for example blockchain such as Ethereum can store program code that automatically executes transactions on chain. So it operates a bit like a decentralized computer and these programs are often referred to as smart contracts and again this enables transactions to be executed much faster on a 24/7 basis without involvement of manual operations. So now let's look a bit more closer at some of the tokenization transactions we have seen in various asset classes and how these can be applied to the life science real-world assets. So I think Richard mentioned just now that for the life science companies a number of them have chosen to partner with various tokenization providers. Basically when life science companies consider tokenizing their life science assets they would need to consider what type of structure and technology they would need to use because there are various options available and different blockchains have different technological features and advantages versus disadvantages. A life science company who's looking to tokenize their assets need to choose a blockchain that fits their commercial, legal and regulatory requirements so there's no one-size-fits-all. One key distinction we look at is whether the blockchain is a public or private blockchain and whether it's permissioned or permissionless. And as mentioned just now a public blockchain such as Ethereum is a one where anyone can become a participant on the chain whereas a private blockchain would be one that is created by a particular operator that needs to be certain on boarding before a participant can become a part of that blockchain. And even for public blockchains there may be certain permissioning so an additional layer above the public blockchain that again includes certain additional requirements or permissioning before participants can join within that public blockchain in relation to the real world asset tokenization that we're talking about. And in a financial market context often this would involve certain KYC or anti-money laundering checks in order to ensure that participants within that chain are acceptable for the players involved. The pros and cons is that for private blockchain they may be more secure but disadvantage is that the system may develop within a silo and it makes it harder for broader investor base, broader number of participants to participate. Whereas for a public blockchain I think the concern would be cyber security as well as AML KYC considerations that we just talked about. And then another related issue is how cash payments will be dealt with in terms of how you acquire the tokens. Will the cash payment to buy the tokens be done off-chain or if it's done on-chain then there needs to be a digital solution in relation to the cash settlement as well. And at the moment we haven't seen a single solution adopted for all the tokenization structures about there at the moment. So some are connected to conventional payment systems so you still need to buy the tokens off-chain using the accuracy. In other cases people have worked with different on-chain payment token providers. So for example tokenized deposits and now with the introduction of the local stablecoin regime potentially we will see some on-chain payment settlement using stablecoins as well. And of course various governments are also working on CBDC or central bank digital currency solutions at the moment. This sums up broadly some of the pros and cons for different DLT platforms ranging from the private permission to the public permission list. And so when you as a life science company are looking to tokenize their assets you will need to look at some of these considerations to come up with a structure that works best for you. Now I'll pass on to Richard to go into a bit more detail about what we talked about just now can be applied in a life science context. Thanks Karen. Let's take a closer look at one of the pioneering cases we mentioned at the beginning. That's the IVD medical case. According to the company's public announcements the IVD medical is setting up a new code plus RWA Web3 exchange ecosystem and stablecoin IVD dollar IVD plan. Specifically IVD medical plans to conduct RWA activities in both Hong Kong and the US and establishes a new code in the US to manage operations. The announcements also publicize to some strategic partnerships enter into between the parties. For one, the IVD medical will enter into a strategic collaboration framework agreement with BGICLE win to establish a fund investing in projects under the new code plus RWA Web3 exchange ecosystem. The global strategic collaboration framework agreement entered into between IVD medical and hash key in August this year. To advance its globally enhanced Ethereum treasury strategy and provide secure, efficient and compliant digital assets services globally. Based on these pioneering cases, a potentially practical structure to be considered for parties is as follows. As we laid out on this slide, a biotech company may establish a new code to hold the pipeline asset for tokenization. The asset, as you can see on the screen, may include typically three types of assets. One is the IP rights and the second one is the regulatory documentation for life sciences industry. And the third type is the commercial contracts enter into the assets. The new code then can enter into a collaboration agreement with a digital asset platform to issue and sell tokens to buyers. Let's turn to the key considerations. One important consideration to start with is what exactly are you tokenizing? As Richard mentioned, there are a number of different types of assets that can be tokenized in the life sciences sector. There could be different considerations depending at which state of the life cycle of these assets you are in. So for early stage pipelines, you may have IP rights, regulatory documentation and commercial contracts relating to assets where the revenue stream is still uncertain. And you're essentially tokenizing the future potential revenue for these assets. And then you also have the second type of assets where they're at a later stage of development and the pipelines are already licensed out. In such case, you would have licensing agreements and various rights under commercial contracts where you can expect revenue stream provided that the sales milestones for revenue, etc. are met. And so I think one key consideration is to think about what type of assets you are tokenizing. Because this will also in turn affect how you tokenize the assets and some of the structuring around it for the issuer of the token. This can either be the product owner itself. So in the case of the diagram just now, it would be the new code who holds the rights to the relevant assets. Or you could also have those sold into a separate special purpose vehicle or held by a third party trustee. In terms of the location of where the project owner or a third party asset holder should be, I think it also depends on the relevant regulatory regime for each jurisdiction. Potentially this could be in Hong Kong, Cayman Islands, EDI, or other regions. Depending on tokenization structure, you could also require certain regulatory approvals. And again, we can go into that in a bit more detail later. But essentially, if the tokenized asset would constitute certain regulated activity, such as being in the form of structured products or funds, the relevant distributor of the tokens would need to have relevant regulatory approvals separately. Since the tokens are also virtual assets, we also need to consider any virtual asset regulatory regime that is in place in the jurisdictions where you distribute the tokens. In terms of the revenue for the token buyers, as well as benefit to the token issuer. Again, I think this goes back to exactly what assets you're tokenizing and the form in which it will be tokenized. If the token buyers are essentially buying into or acquiring rights in relation to early stage pipeline assets, then I think this would be essentially a kind of revenue sharing structure where they will share in the benefit of potential future revenue. For more established assets, such as rights, underlicence, and contracts, then they would essentially be receiving rights to the underlying cash flow from these commercial contracts or income streams. And the benefit to the issue of the tokens is that they can obtain upfront cash by converting uncertain or certain future income revenues stream into immediate funding for the company. And this can then be reinvested into more R&D and to generate more income for the company. So as we mentioned just now, tokenization will involve transfer of IP assets into a vehicle, which then tokenizes these assets so that the token holders will have the legal benefit of these assets. And in conjunction with that, we need to look at the legal issues around the transfer of these assets. So Richard, can you talk us through that? So first, let's talk about the IP rights as the key assets of the biotech companies. So the IP rights can be assigned from the biotech company to the new code, and this process involves the parties executing IP assignment agreement and finding the recordal with the relevant IP offices in the applicable jurisdictions. And second, if we look at the regulatory documentation, such as the IND or NDA, BLA, for the drug development purposes, drug development and commercialization purposes. So shall either be transferred to the new code or reapplied by the new code if there's any regulatory restriction for transfer or assignment. So depending on the specific requirements in the relevant jurisdictions, and finally, potential revenue or income stream coming from the commercial contracts. So this can be achieved through several potential mechanisms, such as the establishing a trust, assigning the right to receive the subsequent payments, issuing structured notes, or alternatively acquire an equity interest in new code. Karen, back to you. Again, the detailed structure will need to depend on the circumstances and the underlying assets of the particular life science company. So for example, if the assignment or transfer of the regulatory file links could be very difficult or burdensome, then we may not use an outright assignment of the underlying rights to the vehicle who then issues the token on the top of the token holders. Certain due diligence will need to be done in relation to the underlying assets and what would be the best way to create the tokenized rights over these assets or the invest. And then once you have determined the nature of the rights that tokenized holders will have in relation to the underlying life science assets, the next thing to consider is how to link the token, which as we mentioned just now is essentially a record on a blockchain with the legally enforceable light or interest to that underlying life science asset. And in tokenization structures, we refer to this process as states. And essentially, this means that the legal documentation for the tokenization needs to link the tokens to the relevant rights to the underlying asset. And this can be done by way of different arrangements. Under Hong Kong law or English law, this can involve the use of a default, which would be a unilateral declaration by the owner of the IP rights or regulatory filing, for example, to fold the benefit of those assets in favor of whoever is the holder of the relevant tokens at the time. You could also potentially make use of other legal mechanisms, such as the contracts rights of the party ordinance in Hong Kong, which confers rights to parties who are not parties to a contract, as well as potentially use in relying on the rules of the relevant blockchain. They have a multilateral contractual framework that allows the rights to the underlying assets to be given in favor of the token holders. So again, when we look at these type of structures, we will need to do some legal analysis in order to determine how this transfer of legalized to the token funders will take place. And I think depending on that legal analysis, the tokens may take various forms, and such as registered tokens, bearer tokens, and claims tokens. And essentially, the difference between these are in terms of how the tokens can be transferred from one holder to another. In the case of a registered token, when the token is transferred, there will be a blockchain-based register that records the token holders, and the transfer becomes legally effective when that blockchain-based register is updated. In the case of a bearer token, the transfer of legal rights take place when the token actually is moved from the exclusive control of one token holder to another. For example, when the token is transferred into the wallet of the buyer of the token. And then finally, you have claims tokens where the rights in relation to the token will be determined by reference to a blockchain-based system controlled by a party operator. So quickly to touch upon the legal characterization of tokens. I think it is helpful that the Hong Kong courts recently have concluded that crypto assets, such as Bitcoin, are a form of property. Previously, there happened a little bit of uncertainty because crypto assets, as well as other virtual assets, don't fit very neatly into the existing body of law in relation to property under the common law systems. But I think now we have a lot more clarity in terms of how virtual assets are viewed from a legal perspective. And in particular, a trust created over virtual assets that would also be recognized under law. And in practice, as we mentioned earlier, tokens may be helped directly by a holder, by a wallet on the blockchain, or they can be held in custody by a virtual asset custody and that controls access to the token. Token holders would need to consider how the custody arrangements are structured, whether the custodian actually holds the tokens on a trust basis so that the end client has proprietary rights, or whether this is on a contractual basis. And I think generally, the market is moving towards a trust basis for the custody of virtual assets. And then finally, it's important to mention that conflicts of laws is important when considering these type of tokenization structures for real world assets. A lot of the underlying real life science assets will be based in different jurisdictions governed by different laws. And I think it's important to make sure that a lot of the legal mechanisms we talked about just now, including, you know, how to transfer the rights to the underlying IP or regulatory assets, as well as, you know, how the stapling works will be effective in all the relevant legal regimes that are involved in real particle structure. Currently, when we talk about tokenization, this can take place in various forms. I think particularly if you're looking to fractionalize life science assets. And I think in this context, it's probably, you know, quite likely, people would want to do that because I think the IP rights or the licensing rights involved will be, you know, quite a sizeable amount. And it probably makes more sense to fractionalize into different subunits so that the asset would be more liquid and be more easily, you know, accessible by different investors. And so, I think, currently, for fractionalizing real-world assets in tokenizations, often this can be done by way of a trust structure or some kind of fund structure. And occasionally, we have also seen a structured note arrangements as well. And if we're talking about, you know, fund or structured notes, then, essentially, these would be considered securities or collective investment schemes, which would be regulated under the security of some futures ordinance. And as mentioned just now, if you're not falling within one of these existing regulated assets, the relevant asset or cash token could also potentially be a virtual asset under the end of the money laundering ordinance in Hong Kong. For the cash payment, like you may also need to consider whether that could be any issues relating to payment systems, what value facility under relevant laws in Hong Kong. And of course, similar considerations will also need to be be analyzed in terms of other jurisdictions where your tokens may potentially be distributed. And so, regulatory due diligence will need to be performed on the structure as well. And I think, depending on different jurisdictions, there are also regulatory guidance in terms of how virtual assets or tokens can be marketed. So, for example, in Hong Kong, I think, so far, a lot of the virtual assets or blockchain structures have been limited to professional investors and only certain relatively, I guess, conservative asset classes have been allowed to be sold to retail customers. So, I think if you're dealing with early stage or relatively complex, underlying assets or structures, then it may be that you'll be limited to selling to professional investors or your structure. Hong Kong has announced their virtual assets strategy framework in June this year to advance Hong Kong's position as a global digital asset hub. I think this has created a lot of regulatory certainty in terms of how different companies can go about their tokenization business activities. And one of the key guiding principles is that if you're doing the same type of activity, whether or not it is done in a conventional way or via tokenization, essentially the same regulations and same risks would apply. So, going back to what we said just now, if your tokenization structure would take the form of a tokenized fund or the structured note, then even though you have this tokenization of blockchain overlay, essentially you would still need to comply with the same regulations for other conventional fund or structured note arrangements. But on top of that, the regulators will also want to make sure that some of the additional technology risks relating to blockchain are addressed. So, for example, if you're using a public blockchain, they will want to make sure that the technology that you use addresses issues such as cyber security risk as well as ensuring that the ownership records are secure and you have backup plans or contingency plans to deal with situations. I think here is a quick snapshot in terms of some of the licensing framework that could apply to more potential structure. Your life science company doesn't have these regulatory licenses in place. Then you may need to look to partner with someone who does have these licenses in order to satisfy the regulatory requirements in relation to the tokenization of agent. We'll leave these final slides for you to take a look at and I think these can be made available on the quest. Thank you all for attending our session.