Hong Kong Securities and Futures Commission to Require Licensing for Fractionalised NFTs

The Hong Kong regulator reminds investors of risks associated with NFTs.
Image source: Medium/IrisNet blog

Quick take:

  • The SFC noted NFTs that cross the boundary between a collectible and financial asset.
  • NFTs of digital media do not fall within the SFC’s regulatory limit.
  • The SFC stated that those who wish to issue fractionalised NFTs in Hong Kong would require a license.

Hong Kong Securities and Futures Commission (SFC) published a statement on Monday, reminding investors of “risks associated with NFTs” including “illiquid secondary markets, volatility, opaque pricing, hacking and fraud.”

The SFC stated that the majority of NFTs, which represent “a unique copy of an underlying asset such as a digital image, artwork, music or video” and “a genuine digital representation of a collectible” do not fall within the regulatory limit.

In the statement, the SFC noted that NFTs that cross the boundary between a collectible and financial asset will be deemed similar to “securities” and fall under a “collective investment scheme. (CIS)”

The SFC defined CIS as such: It must involve a property investment in which participants do not have day-to-day control over the management of the property, but profits or income from which payments are made to them are pooled, with the purpose of receiving profits, income or other returns from the acquisition or management of the property.

Digital assets that fall under SFC’s CIS definition include fractionalised NFTs and tokens. Under these guidelines, those who wish to issue fractionalised NFTs in Hong Kong or target Hong Kong investors would require a license.

NFTs that involve an offer to the Hong Kong public to participate in a CIS would be subject to authorisation requirements under the Securities and Futures Ordinance (SFO).

Some recent examples of fractionalised assets in the NFT space include items on Logan Paul’s Liquid Marketplace, while The Doge NFT is the biggest fractionalised NFT by market cap of $25.33 million.

Authorities in certain countries have been contemplating regulating certain NFTs. In March, Bloomberg reported that the Securities and Exchange Commission (SEC) was looking into whether certain NFTs qualify as securities and thus should be regulated.

In February, the Israeli Security Authority issued a memorandum containing new guidelines on public offerings, which could deem NFTs as securities. 

While senior minister and minister in charge of the Monetary Authority of Singapore (MAS), Tharman Shanmugaratnam, said in February that the country will not be regulating NFTs, he stated that NFTs structured as collective investment schemes will be subject to prospectus and business conduct requirements and licensing.

Last December, DappRadar estimated that the fractionalised NFT market could surpass $200 million in 2021. However, as of this writing, the total fractionalised NFT market cap is $54.8 million.

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