HK’s SFC highlights NFT risks in financial assets

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The Hong Kong Securities and Futures Commission (SFC) has taken note of the risks associated with NFTs, as some of these NFTs have crossed the line between a collectible and a financial asset.

In a statement, the SFC said the majority of NFTs it has observed are intended to represent a single copy of an underlying asset, such as a digital image, artwork, music, or a video. Generally, where an NFT is a true digital representation of a collectible, activities related to it fall outside the regulatory mandate of the SFC.

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

The SFC has further clarified that where an NFT constitutes an interest in a collective investment, marketing or distribution scheme, it may constitute a regulated activity.

Parties engaged in regulated business, whether in Hong Kong or targeting Hong Kong investors, must obtain a license from the SFC, unless an exemption applies.

In addition, where an NFT agreement involves an offer to the Hong Kong public to participate in a collective investment scheme, clearance requirements under the Securities and Futures Ordinance may also be triggered.

PreviouslyINTERACTIVE-MARKETING spoke to industry experts about the basics of NFT for marketers in Hong Kong. For example, To Cheung, founder of UD, said that there is a lack in governance and regulation of the NFT space. However, as the space matures, industry players believe that more structures will be put in place. “Sometimes it’s hard to tell if an NFT product is genuine. For example, when someone offers an NFT product based on a novel Demi-gods and demi-devils, he or she does not need to prove if it is an authentic product or how it was created. To some extent, producing counterfeits is even easier. Since there is no regulation at the moment, when a buyer suspects that the NFT product is genuine, they cannot file a complaint because no one governs,” Cheung said in a previous interview.

Currently, NFT resonates primarily with Gen Z and art lovers, said Vincent Kan, head of digital at Wavemaker Hong Kong. Along with the value of NFT, brands should also take note of its added benefits, such as providing target audiences with members-only communities or events. When it comes to execution, Kan said brands should leverage integrated campaigns like PR, social and influencer marketing events featuring famous digital creators and celebrity endorsers, as well as NFT activities to drive brand association, social buzz and marketing results. Marketers should also consider integrating real events into virtual initiatives such as delivering an NFT product through offline exposure or a physical product.

(Photo courtesy: 123rf)

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