Global Perspectives
HK Web3 Landscape Part 5: Non-Fungible Tokens (NFTs)
Deep-dive into global regulatory approaches to Web3 to help you learn more about global policies, opportunities, and cross-border synergies.
During this year’s Hong Kong Fintech Week 2023 (HKFW2023), the Hong Kong Monetary Authority (HKMA) launched a limited collection of 1,000 commemorative NFTs (short for Non-Fungible Tokens) — crafted by generative AI, awarded to the first 1,000 participants.
This is not the first time, though. At the 2022 edition of the HKFW, the city displayed its firm commitment to integrating Web3 into the real world as organizers distributed 2000 limited-edition NFTs which granted holders several discounts — including to the 2023 HKFW edition. At the same time, token holders could take advantage of the 3D scanners available on premises to create their own augmented reality avatar.
Since the boom of NFTs in 2021, the Hong Kong government has worked to provide a regulated environment for crypto businesses and investors (professional and retail) to thrive and seize the opportunities created by new technologies such as blockchain. NFTs represent one of the most active sectors, both in Hong Kong and globally, which prompted the local authorities to provide clarity on its issuance and trading.
This article will explore the NFT landscape in Hong Kong, specifically:
- What do NFTs qualify as in Hong Kong?
- How are they regulated?
- What does the NFT market look like in Hong Kong?
- Why are mainland China NFT platforms moving to Hong Kong?
What are NFTs, and how are they regulated in Hong Kong?
NFTs — short for Non Fungible Tokens — are unique tokens that cannot be replicated. They represent the digital ownership of real-world or digital assets, such as art, music, collectibles, in-game items, and real estate, to mention a few use cases. NFTs exist on the blockchain and are verifiable on the blockchain. In recent years, this has proven to be of special interest and attractiveness to a wide range of actors — including artists, corporates, celebrities, games, and more — for several reasons.
NFTs can be used to record the digital ownership of an asset to simplify the authentication and trading process. Their authenticity can be established through the blockchain, thus lowering the risks of fraud and counterfeit. At the same time, they allow the fractionalization of intellectual property rights by splitting the costs of otherwise expensive assets (e.g., artworks). Investors of all sizes can now own a piece of intellectual property.
At the same time, NFTs can also represent financial products — such as securities — instead of being the mere digital representation of assets. And it is exactly this that triggers more stringent Virtual Asset (VA) regulations under the Hong Kong legal and regulatory framework.
Currently, there are no NFT-specific laws that regulate the issuance and trading of NFTs. The specifics of how they are regulated depend on the function of an NFT.
NFTs as digital collectibles
When NFTs are simply considered the digital representation of collectibles, they tend to not trigger the licensing regime crafted by the Hong Kong Securities and Futures Commission (SFC), which regulates securities and other financial instruments. This is for example the case for digital images and artworks. In this instance, issuers and NFT platforms need to verify that their activities do not trigger any other licensing regime, though.
For NFTs can represent digital ownership of an asset, corresponding IP-relevant regulations may apply. In this case, the NFT issuer is required to own the IP rights to the underlying asset before the NFT can be issued (or minted). It is the responsibility of the issuer to verify the authenticity of rights and handle any other IP infringement complaint.
NFTs as regulated assets
In June 2022, the Hong Kong’s Securities and Futures Commission (SFC) warned of the risks of NFTs, in particular of those that qualify as financial assets, and not simply as the digital representation of collectibles.
When NFTs carry features of financial assets, e.g., money instruments, regulated financial products (e.g., securities), Virtual Assets, or collective investment schemes, then their issuance and trading will be regulated under the Securities and Futures Ordinance and the SFC.
Collective investment schemes are just one of the examples. Collective investment schemes represent the fractionalization of the ownership of real-life collectibles to allow a wider array of investors — including smaller ones — to own a piece of the asset, sold at a lower price. When an NFT represents a fraction of the interest in an asset, it is possible that the NFT will generate some profit — for example, by reselling the asset. In this case, there is a higher risk that the NFT will be considered a collective investment scheme and be regulated under the SFC.
Regardless of their nature, issuers of NFTs, e.g., platforms that issue and trade NFTs, need to consider every single service provided in relation to the assets (e.g., custody), and verify whether this triggers any other specific licensing requirement. Issuers are required to verify that no IP rights or other contractual terms are infringed through the issuance and trading of the tokens.
The NFT market in Hong Kong
According to Statista, the revenue generated by NFTs in the Hong Kong market is projected to reach US$6,038.0k in 2023, with an annual growth rate (CAGR 2023–2027) of 18.46%.
Hong Kong is expected to feature up to 26.26k NFT users by 2027.
The average revenue per user amounts to US$270.4 in 2023, a still relatively modest amount if compared to the average revenue per user in the United States (US$887.5 in 2023). User penetration is expected to close at 0.29% in 2023 and to hit 0.33% by 2027.
Yet, NFTs’ penetration rate in Hong Kong is currently 0.3 points higher than in the United States (0.29%).
In a similar fashion to other global markets, artists and celebrities from all sectors have shown interest in the NFT space, spanning the cinema (e.g., famous director Wong Kar Wai) and music sectors (e.g., singer Gigi Yim), to mention a couple. In early 20212, the well-known local newspaper South China Morning Post launched its NFT startup — Artifact Labs — and its ARTIFACTs collection, i.e., collectible NFTs from the South China Morning Post ‘s 118 years of archives. The goal? To “…preserve history on the blockchain.”
While the South China Morning Post project may appeal to a wider audience — for example, nostalgics remembering the 1997 Hong Kong handover to China — Hong Kong’s NFT users are mostly younger consumers born in the late 90s or early 2000s (Gen Z) or in the early 80s and 90s (Millennials).
Some of the reasons why Hong Kongers are adopting NFTs include:
- Family/friends have made money trading NFTs (21%)
- Reading about NFTs on social media (17%) and offline news streams (15%)
- NFT released by favorite brands (15%)
- NFTs launched by favorite celebrities (8%)
NFTs are predominantly traded and exchanged in NFT marketplaces, such as Opensea, Rarible, Axie Marketplace, and Foundation. Please note that the data represented above (source: YouGov) may have changed given the new regulatory regime. Since the announcement of the new regulations, Binance is allegedly pursuing a crypto license in Hong Kong through its newly established crypto exchange HKVAEX.
From Mainland China to Hong Kong
In early 2023, news outlets reported that Mainland China NFT platforms and stakeholders started to flock to Hong Kong.
As already well known, the Chinese government fully banned digital assets in 2021 by declaring business activities related to cryptocurrencies as illegal financial activities. And as secondary NFT markets remain a gray area in Mainland China, the more regulated and more embracing environment shaped by the Hong Kong authorities — while still remembering that Hong Kong is a Special Administrative Region of the People’s Republic of China — has attracted the attention of local businesses looking to thrive and offset compliance risks.
An example of such behavior is ShucangCN, an NFT platform that launched in January 2022 in China, which set up NFT China Ltd. to operate in Hong Kong in early 2023. The new platform allowed ShucangCN to facilitate NFT airdrops, sales, and trading of NFTs. Yet one “problem” remains: no income from NFT trading can be transferred back to Mainland China. “That would be illegal and considered money laundering.”
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