Hong Kong Regulator Warns of Securitization Risks for NFTs

Blockonomics
Hong Kong Regulator Warns of Securitization Risks for NFTs
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The Hong Kong Securities and Futures Commission (SFC) recently issued a statement regarding the financial and legal risks of non-fungible tokens (NFTs). It claims that such tokens are not only prone to security vulnerabilities typical of cryptocurrencies, but may also constitute financial assets subject to SFC regulation.

From collectibles to financial assets

According to the regulator’s statement on Monday, NFTs “generally” fall outside the purview of the SFC. These include NFTs created as “true” digital representations of collectibles, such as digital images, artwork, music and videos.

However, the committee claims there are other NFTs that can “cross” the line between collectibles and financial assets. For example, some are “segmented” or “fungible,” making them similar to securities and/or collective investment schemes (CIS).

“If the NFT constitutes an interest in CIS, marketing or distributing it may constitute a ‘regulated activity,'” the regulator said. “Parties carrying on regulated activities, whether in Hong Kong or targeting Hong Kong investors, will need to be licensed by the SFC, unless an exemption applies.”

Authorization requirements may also be triggered if the NFT-related arrangement involves a public offer to participate in the CIS.

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NFTs first really caught on in 2021 and were mostly seen as simple collectibles or speculative items. Some of the most valuable collections include the Boring Ape Yacht Club and simple rock images.

However, newer NFTs are starting to include various forms of utility, such as staking and Metaverse interoperability. Gary Vaynerchuck, CEO of VaynerMedia, believes NFTs will be part of “every contract” that includes the purchase of homes, cars and financial assets.

For now, the SFC is urging anyone who wants to become an NFT investor to exercise caution. “Like other virtual assets, NFTs face higher risks, including illiquid secondary markets, volatility, opaque pricing, hacking and fraud,” their statement read.

U.S. Attitude Towards NFTs

So far, how the U.S. will regulate NFTs, as well as other cryptocurrencies, is unclear. Senator Cynthia Lummis, who will unveil her digital asset regulation bill this week, said NFTs would not be included in the legislation due to the difficulty of defining them.

However, that doesn’t mean they aren’t taken seriously. New York lawyers last week filed charges against a former OpenSea employee who was found to have engaged in insider trading with NFTs in September.

“Today’s charges demonstrate the office’s commitment to preventing insider trading—whether in the stock market or on the blockchain,” said then-attorney Damian Williams.

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