Hong Kong securities regulator says some NFTs may need licensing

For the first time, Hong Kong’s security watchdog, the Securities and Futures Commission (SFC), has issued a warning about non-fungible tokens (NFTs). The SFC stated that NFT issuers in Hong Kong or those targeting its investors must acquire a license if their tokens meet specific criteria. 

According to the SFC news release, these criteria include NFTs that are fractionalized or those set up like securities or interest in a “collaborative investment scheme” (CIS). As defined by the city’s Securities and Futures Ordinance (SFO), such investment vehicles fall under the purview of the SFC.  

Under the ordinance, a CIS includes projects that enable participants to receive profits, income, or other returns. SFC clarifies that NFTs that do not fall in these categories will not be regulated. However, the body still warns of the risks of investing in the asset class. 

The regulator advised investors to perform their due diligence or avoid investing in NFTs if they do not understand or cannot bear the risks in the market. The release read: 

“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 notice comes at a time when global NFT sales have dropped drastically. Per data from Non-fungible.com, the market has fallen from around 200,000 sales per day to 20,000 per day on leading marketplaces. 

Hong Kong is lining up regulations for digital assets

Similar to Hong Kong, the U.S. has also been increasing its scrutiny of the NFT market. Bloomberg reports that the SEC has opened a probe into creators of NFTs and the exchange where they trade. The SEC focuses on whether these assets are being used to raise money like traditional securities. The regulator has sent out several subpoenas demanding details of token issuance from NFT creators. 

Meanwhile, Hong Kong regulators have also been moving towards introducing broad digital assets regulations. The special administrative region of China has previously directed that digital currency exchanges should be licensed to operate in its jurisdiction. 

The licensing regime also requires that exchanges restrict their services to only professional investors. The law is a turnaround from previous lax digital currency regulations.

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