The Securities and Futures Commission (SFC) of Hong Kong, the financial regulator responsible for overseeing Hong Kong’s securities market, has issued an advisory warning to investors. The notice is about risks associated with purchasing and trading unregulated non-fungible tokens (NFTs). The advisory points out that NFTs do not have any legal protections to help ensure that they can be traded as freely and safely as other assets like stocks or bonds, despite their name suggesting they are similar to equity shares.
As of such, the Securities and Futures Commission is clearly worried about regulating these assets. The majority of NFTs observed by the SFC are items that represent a one-of-a-kind asset such as a digital photo, artwork, video, and more. Due to the highly decentralized nature of crypto and the way NFTs function on the blockchain the SFC is concerned over the lack of regulations.
However, while most NFTs are perceived by the SFC as collectibles, others qualify as financial assets and thus meet the SFC’s regulatory framework, depending on how they’re structured. The SFC, because of this, should be imposing regulations on these NFTs. While soliciting residents, these companies in these fields are required to obtain a license to operate in Hong Kong, although this qualification is sometimes exempted.
The exact nature and purpose of the announcement is still a bit vague. Those purchasing blockchain-based collectibles are receiving them on a best efforts basis. This basically means that there isn’t a guarantee for their value down the line. The announcement also warns about investing in virtual assets that aren’t backed by real-world value, like gold or stocks. Meanwhile, it seems as if non fungible tokens being used as currency or security may not be affected by today’s announcement—though it could just be speculation until further details are revealed.
What Are These Non-Fungible Tokens?
Non-fungible tokens, often referred to as NFTs, are essentially distinct digital assets coded for proof of ownership. They are not divisible into smaller units (like a cryptocurrency) or fungible (meaning they have no interchangeable value; every NFT is unique). Essentially, if you own a bitcoin you can divide it in half to give someone else one half. However, if you own an ERC721 non-fungible token like CryptoKitties then “splitting” the NFT can’t be done without destroying your investment. Ownership is protected through digital keys rather than physical possession, making these tokens popular with collectors since they cannot be stolen by traditional means.
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Ray Schuetz received a Masters Degree in computer science from The University of Texas (Austin). Ray has been working as a full-time blockchain consultant for the past 3 years. In his spare time, Ray enjoys writing for EthereumCryptocurrency.com and other crypto news publications.