NFTs in Hong Kong pioneered with art. Auction houses have begun to educate, exhibit and sell NFTs. Sold at around US$550,000 in October 2021, a 91-second film footage featuring behind-the-scenes of the first day of shooting In the Mood for Love was the first Asian film NFT to be offered by an international auction house. Beyond art, clubs, companies and individuals are creating content and selling them on NFT platforms, ranging from memes to urban murals.

While Mainland China may take a more restrictive view against NFTs, Hong Kong is relatively unrestricted, causing an influx of content from Mainland China in addition to local NFTs in the Hong Kong market. Many new NFT start-ups sprung in Hong Kong in a short span of several months, including Lucky Kittens, Going Ape, HolyShxxt!!, and those created by Hong Kong artists such as Edison Chen and Shawn Yue Man-Lok. The NFT market is regarded as the hottest and most chic platform to showcase creators' work, and more practically, the convenient channel to realize value of the same. A recent report revealed that the adoption rate of NFTs in Hong Kong is expected to double to 21.1% in the near future, thus we see a huge potential in the Hong Kong NFT market.

In Hong Kong, there are currently no laws or regulations which specifically regulate NFTs.

The Securities and Futures Commission ("SFC"), which is the regulator of the securities and futures markets in Hong Kong, has indicated that "virtual assets", including cryptocurrencies, will only be regulated under the Securities and Futures Ordinance if they fall under the definition of "securities". Whilst the Hong Kong Monetary Authority ("HKMA"), which is the regulator of the banking sector in Hong Kong, has indicated that Bitcoin is a virtual commodity, and hence not "securities", it is less clear how NFTs would be characterized. Whilst NFT is a form of virtual asset, it is non-fungible and is not a currency. Whether NFT falls under the definition of "securities" depends on the nature of the underlying assets to which it is linked. The SFC has issued a statement in June 2022 to confirm that in general, NFTs which are intended to represent a unique copy of an underlying asset like a digital image, artwork, music or video, and investments in digital representations of a collectible would not fall within the scope of SFC regulations.  However, those which are fractionalized and structured in a way similar to “securities” or interest in a “collective investment scheme” would be regulated.

Having paid a substantial price for a valuable NFT, a buyer may assume that it will obtain ownership of and copyright in the underlying work. However, this is generally not the case. Copyright remains with the author or other owner and the buyer only obtains a right to use the work for certain defined purposes (unless the owner executes an assignment in the buyer's favor).

If buyers' rights of use are not expressly defined, a licence to use will likely be implied but the scope will depend on the circumstances and the interpretation of the contract. To avoid ambiguity, parties should clearly set out the licence terms when transferring NFTs.

From a trademark protection perspective, brand owners have started proactively filing trade mark applications in Classes 9, 35, 36, 41 and/or 42 to protect their digital and NFT-related goods and services. The Hong Kong Trade Marks Registry has recently accepted trade mark applications for marks covering NFT-related goods and services as well as marks incorporating the word "NFT". Here are two notable examples:

• "LEAGUE OF LEGENDS" by the video game developer Riot Games in Class 9 covering "digital materials, namely, non-fungible tokens…" and Class 42 for "software as a service (SAAS) and platform as a service (PAAS) featuring…non-fungible tokens…" (trade mark registration no. 305586544).
• "Elite Apes NFT" by the popular NFT creator Bored Ape Yacht Club Limited in Classes 35 and 41 covering various services relating to digital art in the nature of non-fungible tokens (trade mark registration no. 305734792).

The Financial Services and the Treasury Bureau ("FSTB") has published a proposal on the new licensing regime for Virtual Asset Service Providers ("VASPs") on May 21, 2021. Under the new regime, all VASPs within the regulatory perimeter of SFC will have to be licensed regardless of whether they are trading security or non-security virtual assets under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) ("AMLO").

However, the new proposal expressly provides that the virtual assets do not involve certain closed-loop, limited purpose items that are non-transferable, non-exchangeable and non-fungible such as air miles, credit card rewards, gift card, customer loyalty programmes and gaming coins. While it appears that NFTs will fall outside the definition of "virtual assets", given that SFC is still empowered to prescribe characteristics that constitute virtual assets as authorised under AMLO, it is still uncertain if there would be any changes as to the definition of "virtual assets". The exact nature and characteristic of "virtual assets" is still subject to review and this would affect the licensing requirements of NFTs.

Most data privacy laws, including Hong Kong's Personal Data (Privacy) Ordinance ("PDPO"), are "technology neutral", such that they apply in any context where personal data is processed.

By combining transaction records on blockchain ledgers (which are publicly visible) and information from other sources, such data could constitute personal data within the meaning of the PDPO and the rights and obligations under PDPO could apply. The PDPO, like many other data privacy laws, frames its obligations in the context of the activities of a "data controller" or, in the case of the PDPO, a "data user" (which has the equivalent meaning of a data controller). However, given the decentralized nature of the blockchain, the identification of specific data controllers (and the enforcement of their associated responsibilities under the PDPO) becomes more impractical.

Another particular area of the PDPO that is relevant is in relation to the exercise of data subject rights, whereby the PDPO provides individuals with the right to correct their personal data. However, as transaction records (including public keys and transaction details) on a blockchain ledger are permanent logged and are unalterable, the inherent immutability of transactions on the blockchain ledger presents a challenge for the exercise of this right of correction under the PDPO.

Hong Kong artists experimenting NFTs are liking it – artists are able to set their own prices and engage directly with their fans. One report found that over 10% of people in Hong Kong are planning to own NFTs in the near future. One will see NFT seminars or advertisements on the streets every now and then. The popularity is partially driven by the status of Hong Kong as a center for financial innovation, an emerging hub for arts and cultural exchanges, and partially the fact we are sitting right next to Mainland China which is still currently conservative towards NFTs.

In addition to art, NFTs are encroaching into various fields such as sports, fashion and gaming. A set of generative art collectibles that includes 8,888 special soccer players' NFTs were launched in early 2022. A strategic football management simulation GameFi is being developed. More and more NFT trading platforms emerge in Hong Kong.

As the market continues to develop, significant opportunities will arise for creators, users and NFT holders, in forms of changing verification modes, expanding business scope and shifting ways of communication to become more tech-savvy.

On the other hand, there are obvious challenges and risks from the sky-rocketing popularity of NFTs. NFTs have to navigate through preferred aesthetics or traditional ways of (cryptocurrency) valuation. For cross border transactions, there are applicable legal risks in different countries or regions with varying legal regimes. Meanwhile in Hong Kong, in view of the current lack of regulation on NFTs, like any new technology, NFTs are expected to undergo pains such as high costs of trading and regulatory uncertainty. However, once NFTs gain enough attention and interest, it is likely that NFTs will develop into widely accepted virtual certificates of authenticity, transacted in digital marketplaces like commonplace.