For the first time, Hong Kong's securities watchdog said that several non-fungible tokens (NFTs) investment products must be regulated. They also cautioned investors about the risks of investing in these tokens, according to a report by SCMP.
HONG KONG, CHINA - FEBRUARY 15: Pedestrians walk past an advertisement displaying Non-fungible token (NFT) on February 15, 2022 in Hong Kong, China.
Regulating NFTs
The Securities and Futures Commission (SFC) said in a statement on Monday that some NFTs are fractionalized or structured in a way that is comparable to securities or interests in a "collective investment scheme" (CIS), as defined in the city's Securities and Futures Ordinance (SFO).
The SFC noted that entities which provide those tokens in Hong Kong or target investors in the city must seek a license from the SFC, which could include several authorization requirements.
According to the ordinance, a CIS typically contains projects that allow participants to earn profits, income, or other returns, particularly if they do not have day-to-day authority over asset management.
The SFC noted that, like other virtual assets, NFTS are susceptible to heightened risks such as "illiquid secondary markets, volatility, opaque pricing, hacking, and fraud."
SFC told investors to be mindful of these risks and that if they lack knowledge about it, they should refrain from investing in NFTs.
Hong Kong regulators have been proposing a new regulatory framework managing virtual asset service providers through a licensing scheme and restricting them to servicing professional investors only, according to SCMP.
In January, the Hong Kong Monetary Authority began a public consultation on regulating stablecoins, which it believes might become a widely recognized form of payment.
The public consultation was in line with their proposal to regulate the $150 billion worth of global stablecoin market, including tether and USD Coin that is pegged to the US dollar.
However, the SFC's most recent remark is the first particular reminder that NFTs are under the regulator's purview as a security or a CIS.
"Crypto Winter"
When NFTs became mainstream last year, Hong Kong enthusiasts launched a slew of ventures offering artwork, cartoon avatars, and fractional ownership of digital or physical assets as NFTs.
The SFC's warning, however, comes as the clamor for the tokens has waned globally during what has been termed another "crypto winter," in which the market value of several popular tokens, such as bitcoin and ether, has plummeted.
Charles To, a partner at law firm Ellalan in Hong Kong, argued that the warning is timely and relevant given the rise of NFT projects on online and offline platforms and its massive advertisement "in the subway and on buses."
According to data from Nonfungible.com, daily global NFT sales ranged between 160,000 and 200,000 in November, while it hovered around 20,000 this week. Wallets on the active market have also dropped from over 90,000 in November to roughly 17,000 this week.
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Written by Joaquin Victor Tacla
