Hong Kong Regulator Warns Investors About Risks Associated With NFTs

The financial regulator of Hong Kong warned investors about the securitization risks associated with non-fungible tokens (NFTs) and added that these digital assets can be bound by SFC regulation.

In a statement, the , the Securities and Futures Commission (SFC) said the NFT market is subject to the risks that are tied to cryptocurrencies including "illiquid secondary markets, volatility, opaque pricing, hacking and fraud." The regulator reminded that "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 non-fungible tokens that genuinely amount to artwork like digital images, video, or audio, that are embedded into a blockchain, are currently out of the jurisdiction of the SFC. However, the regulatory authority noted that there are instances wherein NFTs have "crossed the boundary between a collectible and a financial asset." For example, some NFTs are “fractionalized” or “fungible,” which makes them resemble securities and/or collective investment schemes (CIS).

“Where an NFT constitutes an interest in a CIS, marketing or distributing it may constitute a ‘regulated activity,” the regulator said. “Parties carrying on a regulated activity, whether in Hong Kong or targeting Hong Kong investors, require a license from the SFC unless an exemption applies.”

The SFC added that in case any NFT collection involves an offer to the Hong Kong public to participate in a CIS, they need the approval of the regulatory authority and fulfill several requirements as well.

NFTs reached the peak of their popularity last year and the initial days of 2022, according to data from Google Trends. However, the interest in these blockchain-based assets have started to decline since.