SFC reminds investors of risks associated with non-fungible tokens
The Securities and Futures Commission (SFC) in Hong Kong issued a release to remind investors of the risks associated with investing in non-fungible tokens (NFTs), which have increased in popularity in recent years.
As with other virtual assets, NFTs are exposed to heightened risks including illiquid secondary markets, volatility, opaque pricing, hacking and fraud. 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 majority of NFTs which the SFC has observed are intended to represent a unique copy of an underlying asset such as a digital image, artwork, music or video. Generally, where an NFT is a genuine digital representation of a collectible, the activities related to it do not fall within the SFC’s regulatory remit.
However, 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” (Note 1), or in particular, interests in a “collective investment scheme” (CIS) (Note 2).
Where an NFT constitutes an interest in a CIS, marketing or distributing it may constitute a “regulated activity” (Note 3). Parties carrying on a regulated activity, whether in Hong Kong or targeting Hong Kong investors, require a licence from the SFC unless an exemption applies (Note 4).
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.
- As defined in Section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO).
- As defined in Schedule 1 to the SFO, a “CIS” generally has four elements: it must involve an arrangement in respect of property; participants do not have day-to-day control over the management of the property; the property is managed as a whole by or on behalf of the person operating the arrangements or the contributions of the participants and the profits or income from which payments are made to them are pooled; and the purpose or effect of the arrangement is for participants to participate in or receive profits, income or other returns from the acquisition or management of the property.
- “Regulated activities” are specified in Part 1 of Schedule 5 to the SFO.
- Information for businesses which intend to engage in regulated activities involving virtual assets is available from the SFC Fintech Contact Point.
Source: SFC announcement issued June 6, 2022