Hong Kong’s securities watchdog warns some NFT maybe securities

June 7, 2022

By Sharan Kaur Phillora

The Securities and Futures Commission (SFC) of Hong Kong has stepped up its awareness campaign and this time, it is in relation to the risks inherent in the trading of Non-Fungible Tokens (NFTs).

Here’s what we know:

“The Securities and Futures Commission (SFC) wishes to remind investors of the risks associated with investing in non-fungible tokens (NFTs), which have increased in popularity in recent years,” the announcement reads, “As with other virtual assets, NFTs are exposed to heightened risks, including illiquid secondary markets, volatility, opaque pricing, hacking, and fraud. Investors should be mindful of these risks, and if they cannot fully understand them and bear the potential losses, they should not invest in NFTs.”

The SFC noted that NFTs are growing in popularity in Hong Kong and there are a number of NFTs that purely represents the digital representation of an underlying asset and in which case, it has little role to play in the trading of those assets. However, the regulator said there are NFTs that are portrayed as securities and these types must be licensed before it is offered to residents.

“The majority of NFTs which the SFC has observed are intended to represent a unique copy of an underlying asset such as a digital image, artwork, music, or video. Generally, where an NFT is a genuine digital representation of a collectible, the activities related to it do not fall within the SFC’s regulatory remit,” it said adding,

But assets that push the boundary between collectibles and financial assets, such as fractionalized or fungible NFTs structured as securities or collective investment schemes (CIS) in NFTs, do fall under the SFC’s mandate. The solicitation of Hong Kong residents by companies engaged in these activities require the issuer to obtain a license from the SFC unless an exemption applies.

CIS has recently gained traction as they present a plausible solution for individual investors to obtain fractional ownership of real-life collectibles that would be otherwise too cost-prohibitive for any single party. Yet, questions persist as to whether such investment structures constitute securitization.

Non-Fungible Tokens are continually becoming a major source of concern to regulators as there are no frameworks that govern them even in countries where crypto regulations are quite developed.

About the author

Sharan Kaur Phillora’s thirst for knowledge has led her to study many different subjects, including NFTs and Blockchain technology – two emerging technologies that will change how we interact with each other in the future. When she isn’t exploring a new idea or concept, she enjoys reading literary masterpieces.

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