On Monday, the Hong Kong Securities and Futures Commission (SFC) published statement warning investors of the risks of non-fungible tokens, or NFTs, which have exploded in popularity in recent years. The regulator wrote:

“As with other virtual assets, NFTs are subject to heightened risks, including illiquid secondary markets, volatility, non-transparent pricing, hacking and fraud. Investors should be aware of these risks, and if they cannot fully understand them and bear the potential losses, they should not invest in NFTs.”

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However, it appears that the SFC is particularly concerned with the securitization of NFTs. “Most of the NFTs observed by the SFC are intended to represent a unique copy of an underlying asset such as a digital image, artwork, music, or video” that does not require regulation by the SFC.

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But assets that push the line between collectibles and financial assets, such as fractional or fungible NFTs structured like securities, or collective investment schemes (CIS) in NFTs, do fall under the mandate of the SFC. Such activities to solicit Hong Kong residents require the issuer to obtain a license from the SFC, unless an exemption applies.

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CIS has gained momentum recently as they represent an acceptable solution for individual investors to gain fractional ownership of real collectibles that would otherwise be too costly for any individual party. However, questions remain as to whether such investment vehicles constitute a securitization.

One recent attempt by the Royal Antwerp Museum of Fine Arts (KMSKA) to tokenize a million euro worth of a classic painting on the blockchain was carried out through debt securitization. The enterprise has met regulatory requirements with the help of Rubey and Tokeny blockchain entities.