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Wednesday, September 21, 2022

Hong Kong treats some NFTs as financial assets and imposes regulations

Hong Kong is taking on the non-fungible token (NFT) sector. The country’s financial watchdog believes that certain tokens certified on the blockchain can be considered financial assets. They are subject to the same regulations. Firms specializing in NFTs will have to apply for a license to operate in Hong Kong.

Hong Kong distinguishes 2 categories of non-fungible tokens (NFT)

Hong Kong seems determined to regulate the non-fungible token (NFT) sector . In a press release published on Monday, June 6, 2022, the Securities and Futures Commission (SFC), the country’s financial policeman, distinguishes two categories of digital assets certified on the blockchain.

According to the SFC, the majority of NFTs on the market are intended “to represent a single copy of an underlying asset such as a digital image, artwork, music or video” . In this case, the digital works are beyond the organization’s control.

On the other hand, the financial policeman considers that the second category of NFT falls within its “regulatory competence” . These are non-fungible tokens that sit on the border “between a collectible and a financial asset” . The regulator ensures that certain tokens are “structured in a form similar to financial securities” within the framework of a “collective investment regime” .

Regulations to govern the sale of NFTs

Clearly, the SFC seems to target NFTs whose objective is to finance a project and which make it possible to receive benefits. In this case, the organization recalls that regulations have been put in place in Hong Kong. Companies that offer digital assets of this ilk must apply for a license from the SFC . This is also the case for firms located abroad that target investors residing in Hong Kong.

The financial policeman also assures that the NFT market exposes investors to “increased risks, including volatility, opaque prices, piracy and fraud” . The SFC recommends that investors be aware of the risks inherent in the non-fungible token sector before embarking.

Once very soft on cryptocurrencies, Hong Kong has gradually hardened its stance in recent years. Regulators first started increasing their oversight of crypto-asset exchanges and imposing strict rules for trading. Despite the measures taken, the regulations in force in the country remain particularly vague, which complicates the development of specialized companies.

In this context, Binance was forced to abandon its derivatives offering in Hong Kong territory. Many companies then moved their activities to other countries , such as Singapore or the Bahamas. This is particularly the case of FTX, which transferred its headquarters to the Bahamas last year.

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