Hong Kong Securities Regulatory Commission reminds NFT risks

Financial regulators in Hong Kong, China, took notice of non-fungible tokens NFTs.

On June 6, the Hong Kong Securities and Futures Commission (SFC) reminded investors to be aware of the risks associated with non-fungible tokens NFTs.

NFT (Non-Fungible Token) is also called non-fungible token. Like other virtual assets, NFTs face higher risks, including illiquid secondary markets, volatility, opaque pricing, hacking and fraud, the SFC said. “The Securities and Futures Commission has recently noticed that NFTs cross the boundary between collectibles and financial assets.” SFC requires that securities-related NFTs must be regulated, and NFTs involving fundraising must apply for a license or obtain authorization from the SFC.

This is the first time that SFC has involved NFT in the risk warning of virtual assets. This risk warning may be related to the recent popularity of NFTs in the Hong Kong market. Many NFTs involving social avatars, artworks or digital collections are being issued to Hong Kong users. According to data, in the game field involving NFT, Hong Kong users ranked second among 26 countries and regions, second only to Indian users.

SFC: NFTs involved in fundraising must be licensed or authorized

“The China Securities Regulatory Commission reminds investors to pay attention to the risks associated with non-fungible tokens.” On June 6, SFC issued a risk warning announcement on the official website under this title.

Like other virtual assets, NFTs face higher risks, including illiquid secondary markets, volatility, opaque pricing, hacking and fraud, the SFC said. “Investors should be aware of these risks and should not invest in NFTs if they cannot fully understand and bear the potential losses.”

Hong Kong Securities Regulatory Commission reminds NFT risks

For the first time, SFC warns against NFT risks

In addition to prompting risks, SFC also clarified the types of NFTs that need to be regulated in the announcement.

The regulator said most NFTs are designed to represent a unique copy of an underlying asset, such as a digital image, artwork, music or video. In general, if an NFT is a true digital representation of a collectible, the activities associated with it do not fall under the SFC’s purview.

However, the SFC has recently noted that “NFTs straddle the line between collectibles and financial assets,” for example, NFTs that exist in similar structures as “securities,” especially those involving fundraising schemes.

Securities are defined in the Hong Kong Securities and Futures Ordinance as any share, stock, debenture, debenture stock, fund, bond or note issued by a body (whether or not a corporation), government, municipal authority; each rights, options or interests in the project (whether described in units or otherwise) in relation to the project; certificates of interest, participation certificates, interim certificates, interim certificates, receipts for each project, or subscription or purchase of such projects warrant.

The SFC specifically mentioned four elements in the definition of fundraising (CIS, collective investment scheme) under the Securities and Futures Ordinance in the appendix of the announcement: it must involve a property arrangement; the participants have no day-to-day control over the management of the property; the property is organized by the arrangement The persons of the project or their representatives manage as a whole, or the participants’ contributions, and the profits or income from payments made to them are pooled; the purpose or effect of the arrangement is to allow the participants to participate in or from the acquisition, management of the property gain profits, income or other returns.

If an NFT constitutes a fundraising interest, the SFC said, marketing or distributing an NFT may constitute a “regulated activity” and unless an exemption applies, parties engaged in regulated activities, whether in Hong Kong or targeting Hong Kong investors, will be required to obtain information from the SFC license. In addition, authorization requirements under the Securities and Futures Ordinance may also be triggered if the NFT-related arrangement involves an offer to the Hong Kong public to participate in fundraising.

For companies intending to engage in regulated activities involving virtual assets, the SFC has provided links to institutional URLs to obtain relevant information in the announcement.

Hong Kong becomes the second largest market for NFT games

SFC’s risk warning this time shows that financial regulators in Hong Kong, China, have begun to pay attention to NFT-related financial activities. This may be related to the popularity of various types of NFTs in Hong Kong.

In Hong Kong, local players are not only contacting or buying NFT avatars, collections, or participating in NFT-type games online, but they are also entering exhibitions of NFT artworks. NFT ads are starting to appear on subways and buses.

On May 25, Finder, an Australian-based financial data service provider, released a survey report on the usage of NFT games. The report showed that among the 26 countries and regions surveyed, Hong Kong ranked second, after India.

Hong Kong Securities Regulatory Commission reminds NFT risks

Usage of NFT games in Hong Kong

Taking P2E (Play To Earn) games as an example, Finder data shows that 34% of Indian respondents said they have played P2E games. The second highest proportion of such games is Hong Kong, at 29%, followed by the United Arab Emirates. , the proportion reached 27%. For NFT-related games, Finder predicts that by the end of 2022, the proportion of Hong Kong players will increase, and it is expected to reach 36.3%.

Not only NFT games are popular in Hong Kong, but also avatar NFTs and NFT digital art collections have also entered the field of ordinary users with the drive and participation of entertainment stars.

Monkey Kingdom, an avatar NFT series inspired by Chinese cultural IP Monkey King, has been loved by stars such as singer Zhou Xingzhe and Lin Junjie. Jay Chou has been deeply involved in the creation of NFTs, and jointly launched the NFT series Phanta Bear with the blockchain entertainment platform Ezek Club.

Art-related NFT exhibitions have also begun to enter the Hong Kong market, such as Digital Art Asia, Meta Nostalgia, and The METACADE, among others. When market users gather, NFT projects start selling to Hong Kong users. Recently, a project called Metaworld Development sells virtual land in the form of NFT to Hong Kong users.

When NFTs open the market in Hong Kong, China, financial-related NFT activities will inevitably receive regulatory attention.

In an interview with the South China Morning Post, Charles To, a partner at Ellalan law firm in Hong Kong, said that given the large number of new NFT projects being marketed to the public in Hong Kong both online and offline, “such as the large number of billboards on subways and buses, “The SFC’s alert is a timely and well-founded warning.

Regarding virtual assets and encrypted assets, the financial regulators in Hong Kong, China have been adopting an attitude of “inclusion into supervision”. Including SFC, Hong Kong’s regulators have gradually built a regulatory framework to manage virtual asset service providers with a licensing system. , and restrict them to serving only professional investors.

In January, the Hong Kong Monetary Authority (HKMA) also launched a consultation to solicit public feedback on stablecoin regulation aimed at addressing the risks such fiat-backed digital tokens pose to Hong Kong’s financial system, proposing Oversee the $150 billion global stablecoin market, including USDT and USDC pegged to the U.S. dollar.

Now, NFT has also entered the regulatory field of Hong Kong, China, especially when it is used as a security or fundraising method. This regulatory strategy is beginning to be in line with international standards.

In March this year, the U.S. Securities and Exchange Commission (SEC) also reviewed illegal crypto token offerings in the NFT market to assess whether they were being used as securities or fundraising; in April this year, when faced with some NFT projects operating music rights, South Korea’s The financial regulator, the Financial Services Commission (FSC), has included a music copyright claim in the securities, deeming it an investment contract.

In the NFT pandemic, financial regulators in many countries have begun to focus on this emerging crypto asset, adding another layer of uncertainty to the market.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/hong-kong-securities-regulatory-commission-reminds-nft-risks/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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