Hong Kong’s Securities and Futures Commission (SFC) has highlighted the risks involved with investing in non-fungible tokens (NFTs), as popularity continues to surge among retail investors, reports our sister publication, International Adviser.
The regulator said that NFTs are exposed to illiquid secondary markets, volatility, opaque pricing, hacking and fraud, and investors should be vigilant and mindful of these, especially if they cannot understand them or bear any potential losses.
If so, the SFC urges them not to invest in these products.
But the watchdog also reminded firms that not all NFTs are outside the scope of regulation.
While the majority of such tokens are intended to represent a “unique copy of an underlying asset” such as a digital image, artwork, music or video, some of them fall within the financial world.
The SFC noted that some have “crossed the boundary” between a collectible and a financial asset, especially those that are structured in a similar way to securities or interests in a collective investment scheme (CIS).
The regulator said: “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 licence 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 may also be triggered.”