NFT Marketplace Operations in Hong Kong: Legal and Regulatory Guide

Introduction

Non-fungible tokens (NFTs) have emerged as a significant new category of digital asset, representing unique or limited digital items including artwork, collectibles, music, in-game assets, and tokenised real-world items. As the NFT market has matured, Hong Kong has become an important centre for NFT trading, creation, and marketplace operations. This guide addresses the key legal and regulatory considerations for NFT marketplace operators and creators operating in Hong Kong.

What Is an NFT?

An NFT is a cryptographic token on a blockchain that represents ownership of a unique digital asset. Unlike fungible tokens (such as Bitcoin or Ether), each NFT is distinct and cannot be exchanged on a like-for-like basis. The NFT records ownership and provenance on a blockchain, but the underlying asset (e.g., digital artwork or a music file) is typically stored off-chain.

Regulatory Classification of NFTs in Hong Kong

The SFC has taken a technology-neutral approach to regulation: whether an NFT falls within the regulatory perimeter depends on its characteristics, not its label.

When NFTs Are Not Regulated Securities

NFTs that represent unique digital collectibles with no investment return features, profit-sharing rights, or governance rights are generally not considered securities or interests in a collective investment scheme. Pure art NFTs and profile picture (PFP) collections typically fall outside the securities regulatory perimeter.

When NFTs May Be Regulated

NFTs may attract regulatory scrutiny where they:

• Represent fractional interests in an underlying asset, effectively constituting shares in a collective investment scheme
• Carry profit-sharing or dividend-like rights linked to the performance of a business
• Are marketed as investment products with expected returns
• Are issued in large fungible batches that undermine their non-fungibility

The SFC has specifically warned against NFT fractionalization schemes that may constitute collective investment schemes requiring SFC authorisation.

Intellectual Property Rights and NFTs

A common misconception is that purchasing an NFT transfers the intellectual property rights (copyright, trademark) in the underlying work. In the absence of an express assignment, this is not the case. The NFT buyer receives a blockchain-based token recording ownership; the copyright in the underlying work typically remains with the creator unless expressly transferred.

NFT marketplaces and creators should clearly document the rights being transferred with each NFT sale. This is typically done through terms and conditions or a licence agreement that specifies:

• Whether the buyer receives a personal (non-commercial) licence or a commercial licence
• Whether the buyer may reproduce, display, or create derivative works
• Whether intellectual property rights are fully assigned

Consumer Protection and Platform Terms

NFT marketplace operators should ensure their terms of service are clear on key matters including:

• What the buyer receives (the token, not necessarily the underlying asset or its IP)
• Secondary market royalty structures and how they are enforced (or not) at the smart contract level
• The process for resolving disputes between buyers and sellers
• Risks of the underlying blockchain, smart contract vulnerabilities, and loss of access to wallets

AML/KYC Obligations for Marketplaces

NFT marketplaces operating in Hong Kong should consider their AML/CFT obligations. If the marketplace facilitates transactions in virtual assets that constitute regulated activities under Hong Kong law, it may need to obtain a VASP licence from the SFC (covering Type 1 – dealing in securities, if applicable). Even where a full VASP licence is not required, sound AML/KYC practices are advisable to mitigate the risk of the marketplace being used for money laundering through high-value NFT transactions.

Creator Rights and Royalties

NFT smart contracts commonly include royalty provisions that entitle the original creator to a percentage of secondary sales. However, the enforceability of these royalties depends on the marketplace's support for the royalty standard and the technical implementation. Creators should understand that royalties programmed into a smart contract can be bypassed by peer-to-peer transfers or marketplaces that do not honour the royalty standard.

How Alan Wong LLP Can Assist

Alan Wong LLP advises NFT creators, marketplace operators, collectors, and investors on the full range of legal issues arising from NFT activities in Hong Kong. Our digital assets team provides regulatory analysis, IP rights documentation, marketplace terms of service, and AML compliance advice. We also assist with disputes arising from NFT transactions and advise on emerging regulatory developments affecting the NFT ecosystem.