Digital Assets & Virtual Assets
RWA Tokenisation in Hong Kong: Legal Framework and Structuring Guide
Introduction
Non-fungible tokens (NFTs)—unique blockchain-based digital assets that can represent ownership of digital or physical items—have transformed the market for digital art, collectibles, music, and other creative works. One of the most distinctive features of NFT markets is the promise of programmatic royalties: a mechanism built into the NFT's smart contract that automatically transfers a percentage of each secondary sale back to the original creator. For digital artists and content creators, this represents a potentially transformative departure from traditional intellectual property economics, where artists receive payment only for the initial sale of their work and receive nothing from subsequent resales.
However, the legal reality of NFT royalties is considerably more complex than the technology suggests. This article examines the legal basis for NFT royalties under Hong Kong law, the intellectual property issues that arise in the context of NFTs, the enforceability of royalty mechanisms, and the regulatory framework that may apply to NFT transactions involving Hong Kong creators and platforms.
What Are NFT Royalties?
NFT royalties are payments made to the original creator of an NFT each time the NFT is sold or transferred on a secondary market. The royalty mechanism is typically implemented in the smart contract governing the NFT collection: when an NFT is transferred, the smart contract automatically directs a specified percentage (commonly 5-10%) of the sale price to the creator's designated wallet address.
The royalty mechanism promises to give creators ongoing economic participation in the secondary market for their works—a benefit that has historically been unavailable in most creative industries. Physical artists, for example, have no legal right to a share of secondary market sales in most jurisdictions (with the exception of artist resale rights in certain jurisdictions, which do not apply in Hong Kong). The NFT royalty mechanism was therefore hailed as a democratisation of secondary market economics for digital creators.
In practice, however, NFT royalties are not universally enforced. The royalty mechanism is implemented at the platform level, not at the protocol level—meaning that NFT marketplaces can choose whether or not to honour royalty payments when they process secondary sales. Starting in late 2022, several major NFT marketplaces made royalties optional or reduced them to zero, leading to a significant reduction in royalty income for many creators. This development has highlighted the gap between the technical promise of NFT royalties and their legal enforceability.
Intellectual Property Ownership and NFTs
The relationship between an NFT and the intellectual property in the underlying work is frequently misunderstood by buyers and creators alike. An NFT is a unique digital token recorded on a blockchain; it is not the work itself, and purchasing an NFT does not automatically transfer copyright in the underlying work to the buyer. Unless the smart contract or the terms of sale expressly transfer copyright, the creator retains all copyright in the underlying work, and the NFT buyer acquires only the token—a record of ownership of the NFT—without any copyright or other intellectual property rights.
In Hong Kong, copyright in an original artistic work—including digital art, music, and other creative content—arises automatically on creation under the Copyright Ordinance (Cap. 528). Copyright belongs initially to the author (the creator) and gives the copyright owner the exclusive right to reproduce, publish, distribute, adapt, and publicly display or perform the work. A copyright owner can license or assign their copyright to others, but such a transfer must be in writing to be legally effective for an assignment of copyright.
NFT buyers who wish to acquire copyright in the underlying work, or to obtain a licence to use the work commercially, should ensure that the purchase terms expressly address these issues. Many NFT projects offer limited licences—for example, allowing the NFT holder to display the image for personal, non-commercial use—but do not transfer full copyright. Buyers who intend to commercialise the underlying work (for example, by producing merchandise, licensing the image for advertising, or creating derivative works) should carefully review the applicable licence terms before purchasing.
The Legal Basis for NFT Royalties
NFT royalties, as implemented through smart contracts, do not have a specific legal basis under Hong Kong law. They are not equivalent to the artist resale right (droit de suite) recognised in some jurisdictions—Hong Kong has not adopted such a right. Instead, NFT royalties are best understood as a contractual mechanism implemented through the terms of the NFT purchase agreement and the smart contract governing the NFT collection.
The enforceability of NFT royalties as a contractual matter depends on: whether the terms governing the NFT expressly require buyers to pay royalties on secondary sales; whether those terms are incorporated into each successive purchase agreement; and whether the marketplace through which secondary sales occur is bound by those terms.
In practice, NFT royalty terms are typically set out in the collection's terms of service or in on-chain metadata. However, ensuring that these terms are legally binding on each successive buyer—who may purchase through a marketplace with different terms—is legally complex. Where a marketplace expressly disclaims any obligation to collect or enforce royalties, and the buyer is not otherwise bound by the collection's royalty terms, the creator may have limited legal recourse if royalties are not paid.
On-Chain vs. Off-Chain Royalty Enforcement
The NFT industry has debated two approaches to royalty enforcement: on-chain enforcement and off-chain enforcement. On-chain enforcement would implement royalty obligations at the smart contract or protocol level in a way that makes it technically impossible to transfer an NFT without paying the royalty. For example, the smart contract could be programmed to reject transfer transactions that do not include the required royalty payment. Some NFT projects have implemented on-chain royalty enforcement mechanisms, but these often come at the cost of reduced flexibility and compatibility with a wider range of marketplaces and wallets.
Off-chain enforcement relies on marketplace policies and legal agreements to ensure royalties are paid. Where a marketplace agrees to collect and remit royalties, it typically implements this by retaining a portion of each secondary sale transaction and forwarding it to the creator's designated wallet. Where a marketplace does not collect royalties, creators must rely on the contractual terms binding buyers to pay royalties directly or on other legal mechanisms.
From a Hong Kong legal perspective, the most robust approach to royalty enforcement is to ensure that: the NFT purchase agreement clearly requires buyers to pay royalties on all secondary sales and to pass this obligation to future buyers; the terms are incorporated by reference into all transactions on any marketplace where the NFT may be traded; and where possible, technical mechanisms are implemented to enforce royalties on-chain.
Regulatory Considerations for NFT Royalties
In Hong Kong, NFTs and NFT royalties are not subject to specific regulation. The regulatory treatment of a particular NFT depends on its characteristics. Most art and collectible NFTs are not regulated as securities under the Securities and Futures Ordinance (SFO), as they do not represent equity, debt, or interests in a collective investment scheme. However, NFTs that carry rights to a share of future revenues—which could include royalty-paying NFTs in some structures—may in certain circumstances be classified as securities or interests in a collective investment scheme, particularly where the NFT is marketed as an investment opportunity with expected returns from the creator's royalty stream.
Hong Kong creators and platforms that structure NFT royalty products as investments should seek legal advice on the securities law classification of their offerings before proceeding. Marketing NFT royalty products as investment opportunities without complying with applicable securities law requirements could expose creators and platforms to regulatory sanctions.
Tax Treatment of NFT Royalties in Hong Kong
The tax treatment of NFT royalty income in Hong Kong depends on the nature and structure of the arrangement. Hong Kong does not impose capital gains tax, and income received by individuals that does not arise from employment or from the carrying on of a trade or profession in Hong Kong is generally not subject to Hong Kong tax.
For creators who regularly produce and sell NFTs as part of a business or profession, royalty income received from secondary sales may be subject to Hong Kong profits tax if it arises in or is derived from Hong Kong. The characterisation of royalty income as trading income (subject to profits tax) or as a passive capital receipt (generally not subject to Hong Kong tax) depends on the specific facts of each case. Creators who receive material royalty income should seek tax advice on their position.
Practical Recommendations for Creators
Hong Kong-based digital artists and content creators who wish to maximise the protection of their intellectual property rights and royalty income from NFT sales should: clearly retain copyright in their works and grant only limited, defined licences to NFT buyers through explicit written terms; use smart contracts that implement on-chain royalty mechanisms where technically feasible; ensure that the terms of their NFT collections clearly specify the royalty percentage, the payment mechanism, and the obligation of successive buyers to comply with the royalty terms; work with platforms that have a clear commitment to enforcing creator royalties; seek legal advice on the structuring of their NFT terms and the applicable regulatory requirements; and consult a tax adviser regarding the treatment of royalty income.
Conclusion
NFT royalties represent a significant innovation in creator economics, but their legal enforceability in Hong Kong depends on the contractual framework surrounding each NFT collection rather than on any statutory right. Digital artists and creators who wish to benefit from secondary market royalties should pay careful attention to the legal terms governing their NFTs, the intellectual property rights they retain, and the platforms through which their NFTs are traded. As the NFT market and the legal framework surrounding it continue to evolve, creators should seek up-to-date legal advice to ensure their rights are protected.
Alan Wong LLP's Digital Assets & Virtual Assets practice advises digital artists, NFT platforms, and investors on all aspects of NFT law in Hong Kong, including intellectual property rights, royalty structuring, regulatory classification, and contractual protection. Contact us to discuss how we can help protect your creative rights in the NFT space.
