Recent Hong Kong Securities and Futures Commission (SFC) Release An advisory paper that recognizes NFTs as a “collective investment scheme” rather than a collectible.
With this approval, the NFT will be under the jurisdiction of the SFC. Regulators consider NFTs that require certain types of licenses to be a very risky investment.
This letter recognizes the nature of NFTs and the current trajectory of becoming a securities-like investment tool. The letter states:
“SFC recently focused on NFTs […] It is composed in a form similar to “securities” […]Or especially interest in the “Group Investment Scheme” (CIS) “
This shift to becoming an investment tool has been the subject of NFTs under the jurisdiction of the SFC. With the new approach, for NFTs interested in CIS, marketing, or distribution, the NFT requires a specific SFC license.
Collective investment scheme
The SFC defines a collective investment scheme as a scheme that includes arrangements for assets that are managed as a whole. Participants have no control over the management of their assets and participate in seeking financial gain.
By this definition, all NFT collections released in Hong Kong or targeted at Hong Kong investors fall under the CIS definition and will require a license in the future.
Hong Kong regulatory framework
SFC and Hong Kong Monetary Authority (HKMA) jointly issued The 2022 Cryptographic Regulation Circular on January 28, 2022. Circular contains a definition of virtual assets to address issues related to virtual assets.
Virtual asset products include all assets that have an investment purpose, derive value from the virtual asset, or duplicate the return on investment that corresponds to the return on investment of the virtual asset.
Circular also includes detailed guidance for organizations planning to distribute or process virtual assets. Each company, whether a professional investor or an individual customer, needs to obtain a specific license depending on the target customer segment.
Risk of NFT
SFC considers NFTs as a virtual asset-related product because NFTs replicate the return on investment that corresponds to the return on investment in virtual assets.
However, SFC still considers NFTs to be particularly dangerous. A recent letter warns NFT investors that they tend to lose profits due to illiquid secondary markets, price volatility, opaque pricing, hacking, and fraud.
