Hong Kong’s Securities and Futures Commission (SFC) recently issued an advisory document that recognized NFTs as “collective investment schemes” rather than collectibles.
Recognition places NFTs under the jurisdiction of the SFC. The regulator considers NFTs to be very risky investments that require a specific type of license.
The letter acknowledged the nature of NFTs and their current trajectory to becoming an investment tool similar to securities. The letter stated:
“The SFC recently rated the NFTs […] structured in a form similar to “securities” […]or in particular, interests in a “collective investment scheme” (UCITS)”
This move towards becoming an investment tool has brought NFTs under the jurisdiction of the SFC. With the new approach, for any NFT that constitutes an interest in a CIS, marketing or distribution, NFT requires a specific SFC license.
Collective investment scheme
The SFC defines collective investment schemes as schemes which involve an agreement relating to assets managed as a whole; the participants have no control over the management of the property and participate in the search for financial profitability.
Under this definition, all NFT collections published in Hong Kong or targeted at Hong Kong investors fall under the IEC definition and therefore will now require a license.
Hong Kong regulatory framework
The SFC and the Hong Kong Monetary Authority (HKMA) jointly issued the Crypto Regulatory Circular 2022 on January 28, 2022. The circular includes a definition of virtual assets and discusses product issues related to virtual assets.
Virtual asset products include all assets that have an investment objective, derive their value from virtual assets, or replicate investment returns corresponding to those of virtual assets.
The circular also includes detailed guidance for organizations considering distributing or processing virtual assets. Each company must obtain a specific license depending on its target customer segment, whether professional investors or private clients.
Risks of NFTs
SFC views NFTs as a product related to virtual assets because they replicate investment returns that match those of virtual assets.
With that, however, SFC still sees NFTs as particularly risky. The recent letter warns NFT investors that they are at risk of losing revenue due to illiquid secondary markets, price volatility, opaque pricing, hacking and fraud.