Hong Kong’s Securities and Futures Commission (SFC) recently issued a statement on the financial and legal risks surrounding non-fungible tokens (NFTs). It claims that such tokens are not only prone to security vulnerabilities specific to crypto, but can also become a financial asset bound by SFC regulation.
From collectibles to financial assets
According to the regulator’s statement on Monday, NFTs “generally” do not fall under the regulatory purview of SFCs. These include NFTs created as “real” digital representations of collectibles such as digital images, artwork, music and videos.
However, the commission claims that there are other NFTs that “cross the border” between collectibles and financial assets. Some, for example, are “fractional” or “convertible”, making them similar to securities and/or collective investment schemes (CIS).
“Where an NFT is interested in a CIS, its marketing or distribution may constitute a ‘regulated activity’,” the regulator said. “Parties carrying out regulated activity, whether based in Hong Kong or targeting Hong Kong investors, require a license from the SFC, unless an exemption applies.”
Authorization requirements can also be triggered if arrangements relating to NFTs include public offers to participate in the CIS.
NFTs saw their first real jump in popularity in 2021, mostly recognized as ordinary collectibles or speculative items. Some of the most valuable collections include simple images of Bored Ape Yacht Club and rocks.
However, newer NFTs are starting to incorporate various forms of utility, such as staking and metaverse interoperability. Gary Vaynerchuk – VaynerMedia CEO – believes that NFTs will be part of “every contract”, which includes buying homes, cars and financial assets.
For now, SFC urges anyone looking to become an NFT investor to exercise caution. “Like other virtual assets, NFTs are subject to increased risks including illiquid secondary market, volatility, opaque pricing, hacking and fraud,” their statement read.
America’s approach to NFTs
So far, as with the rest of crypto, the US approach to regulating NFTs is unclear. Senator Cynthia Loomis, who is set to reveal her digital asset regulation bill this week, said the difficulty in defining NFTs will not be addressed in law.
This does not mean that they are not being taken seriously. Lawyers in New York filed charges last week against a former OpenSea employee who was caught doing insider trading with NFTs in September.
“Today’s allegations demonstrate the commitment of this office to stamp out insider trading – whether in the stock market or on the blockchain,” said attorney at the time, Damien Williams.
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