The Hong Kong Securities and Futures Commission (SFC) warned investors on June 6 of the risks associated with non-fungible tokens (NFTs), which have become increasingly popular recently. Investors should be aware of these risks and should not invest in these assets if they do not fully understand NFTs and are not exposed to potential losses.
According to the SEC’s observations, most NFTs are intended to represent a unique version of their underlying asset, such as an electronic image, artwork, music or film. Overall, if an NFT is a true collection in digital form, the activity associated with it is outside the scope of the SEC’s regulation.
However, the SEC has recently become aware of NFTs that cross the line between collectibles and financial assets, such as subdivided or homogenized NFTs with structures similar to “securities” or, in particular, interests under “collective investment schemes.
If an NFT constitutes an interest under a collective investment scheme, the promotion or distribution of the NFT may constitute a “regulated activity”. Any person who wishes to carry on a regulated activity (whether in Hong Kong or to Hong Kong investors) must be licensed by the SFC unless an exemption is granted.
In addition, if the NFT arrangement involves an offer to the Hong Kong public to participate in a collective investment scheme, the authorization requirement under the SFO may also be triggered.