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The Hong Kong Securities and Futures Commission (SFC) has released a statement urging investors to be cautious about the risks posed by non-fungible tokens (NFTs). NFTs have gained immense popularity over the past year, Hong Kong has taken note of the popularity, and the regulatory body is now turning attention to the sector.

Hong Kong regulator warns about NFTs

“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 announcement said.

However, it now looks like the main concern of the SFC could be in the security surrounding NFTs. The regulatory body noted that most of the NFTs investigated claimed to provide a unique digital copy of an underlying asset like artwork, music, video, or image. Such assets are not subject to the regulatory scrutiny of the SFC.

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On the other hand, NFTs could be classified as financial assets. According to the SFC, some assets went beyond being mere collectibles to being classified as financial assets. Such NFTs include fractionalized or fungible NFTs issued like securities or collective investment schemes (CIs). These NFTs fell under the regulatory scope of the SFC.

The action of soliciting funds from residents based in Hong Kong by selling them NFTs have also become quite popular over the past year. Companies using NFTs to gather funds from investors must seek a license from the SFC. The license would not be required if there were exemptions.

Popularity of CISs

CIS has become a common concept over the past few months. These products have become quite popular because they offer a plausible solution for individual investors to receive fractional ownership of real-life collectibles. These assets would come at a higher cost than any one party.

However, there have been concerns over whether these investment structures equate to securitization. One of the latest such products to be released was by the Royal Museum of Fine Arts Antwerp (KMSKA) to tokenize a classic painting valued at a million euros. The move will be enabled by debt securitization. The venture was accompanied by regulatory requirements through the support of blockchain firms like Rubey and Tokeny.

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