The Securities and Futures Commission (SFC) of Hong Kong issued a statement on Monday cautioning investors about the dangers of nonfungible tokens (NFTs.)
According to the governing organization,
“As with other virtual assets, NFTs are exposed to heightened risks, including illiquid secondary markets, volatility, opaque pricing, hacking and fraud. Investors should be mindful of these risks, and if they cannot fully understand them and bear the potential losses, they should not invest in NFTs.”
The SFC’s main worry, however, appears to be the securitization of NFTs. “The majority of NFTs seen by the SFC is meant to represent a unique duplicate of an underlying asset such as a digital image, artwork, music, or video,” according to the SFC, and hence are not subject to regulation.
However, assets that blur the line between collectibles and financial assets, such as fractionalized or fungible NFTs structured as securities or collective investment schemes (CIS) in NFTs, are subject to the SFC’s supervision.
Unless an exemption exists, organizations engaging in certain activities must get a license from the SFC before soliciting Hong Kong people.
CIS has recently gained traction as a viable way for ordinary investors to purchase fractional ownership of real-life items that would otherwise be too expensive for any single party. However, the topic of whether such investment structures are securitized continues to be debated.
The Royal Museum of Fine Arts Antwerp (KMSKA) used debt securitization in a recent endeavor to tokenize a million-euro classic painting on the blockchain. With the help of blockchain companies Rubey and Tokeny, the company was able to meet regulatory standards.
