HK’s SFC highlights NFT risks in relation to financial assets

Hong Kong’s Securities and Futures Commission (SFC) has noted on the risks associated with NFTs as some of these NFTs have crossed the boundary between a collectible and a financial asset.

In a statement, the SFC said the majority of NFTs that it had observed are intended to represent a unique copy of an underlying asset, such as a digital image, artwork, music or video. Generally, where an NFT is a genuine digital representation of a collectible, the activities related to it do not fall within the SFC’s regulatory remit.

However, it added that some NFTs have crossed the boundary between a collectible and a financial asset. For instance, fractionalised or fungible NFTs structured in a form similar to securities, or in particular, interests in a “collective investment scheme”. 

The SFC further elaborated that when an NFT constitutes an interest in a collective investment scheme, marketing or distributing, it may constitute a regulated activity.

Parties carrying on regulated activities, whether they are in Hong Kong or targeting Hong Kong investors, need to obtain a licence from the SFC unless an exemption applies. 

In addition, when an arrangement in relation to an NFT involves an offer to the Hong Kong public to participate in a collective investment scheme, authorisation requirements under the securities and futures ordinance may also be triggered.

Previously, MARKETING-INTERACTIVE spoke to industry experts about NFT basics for marketers in Hong Kong. For example, To Cheung, founder of UD said that there are lack in the governance and regulation of the NFT space. However, as the space matures, industry players speculate that more structures will come in place. “Sometimes it is hard to tell whether an NFT product is genuine. For instance, when a person offers an NFT product inspired by novel Demi-Gods and Semi-Devils, he or she doesn’t need to prove whether it is a genuine product or how it is created. To some extent, producing counterfeits is even easier. As there is no regulation at the moment, when a buyer suspects whether the NFT product is genuine, he or she cannot lodge a complaint as nobody is governing,” Cheung said in an earlier interview. 

Currently, NFT resonates mostly with Gen Z and art enthusiasts, Wavemaker Hong Kong’s head of digital Vincent Kan said. In addition to the value of NFT, brands should also take note of its incremental benefits of it, such as providing the target audience with member-only communities or events. When it comes to execution, Kan said brands should leverage integrated campaigns such as PR events, social and influencers marketing featuring famous digital creators and celebrity endorsers, alongside NFT activities to drive brand association, social buzz and marketing outcome. Marketers should also consider integrating real life events into virtual initiatives such as delivering an NFT product through an offline exhibition or physical product.

(Photo courtesy: 123rf)

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