The Securities and Futures Commission (SFC) of Hong Kong cautions investors of the risks associated with investing in non-fungible tokens (NFTs), which have increased in popularity in recent years.

According to a statement by the SFC, NFTs are exposed to heightened risks including illiquid secondary markets, volatility, opaque pricing, hacking and fraud as with other virtual assets.

The regulator added,

“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, or in particular, interests in a collective investment scheme (CIS).

Where an NFT constitutes an interest in a CIS, marketing or distributing it may constitute a regulated activity.

Parties carrying on a regulated activity, whether in Hong Kong or targeting Hong Kong investors, require a license from the SFC unless an exemption applies.

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 Securities and Futures Ordinance (SFO) may also be triggered.