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With the price volatility of cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH), regulators are understandably concerned that consumers might not be fully cognizant of the risks associated with cryptos and other digital assets. Hong Kong’s securities regulator has recently issued a warning cautioning investors of the risks associated with non-fungible token and advised them to invest in NFTs only if they fully understand the potential risks involved.
“The Securities and Futures Commission (SFC) wishes to remind investors of the risks associated with investing in non-fungible tokens (NFTs), which have increased in popularity in recent years,” the SFC said in a statement.
The regulator highlighted some of the risks associated with NFTs while advising investors to stay away from the asset class if they lack adequate knowledge on these assets. “As with other virtual assets, NFTs are exposed to heightened risks including illiquid secondary markets, volatility, opaque pricing, hacking and fraud,” SFC wrote. “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 regulator acknowledged that majority of non-fungible tokens and their related activities do not full under its regulatory scope. This is true for NFTs that are unique digital representations of a collectible where the underlying asset could be an artwork, digital image, video, or music.
However, the Commission noted that some recent NFTs no longer behave as mere collectibles and more like financial assets. “The SFC has recently noted NFTs which cross the boundary between a collectible and a financial asset, for instance, fractionalised or fungible NFTs structured in a form similar to “securities,” or in particular, interests in a “collective investment scheme” (CIS).
The SFC explained that marketing or distributing NFTs that constitute an interest in a CIS may be considered regulated activities. Thus, entities engaged in their marketing or distribution will be required to obtain a license from the SFC if they carry out these activities in Hong Kong or are targeting them to Hong Kong investors.
“In addition, where an arrangement in relation to an NFT involves an offer to the Hong Kong public to participate in a CIS, authorisation requirements under the SFO may also be triggered,” the SFC added
