Protection of Nonfungible Tokens in China
The non-fungible token (NFT) industry is booming in China. But it runs differently from other worldwide operations in that respect. Instead of being called "tokens," NFTs are referred to in China as "digital collectibles" to avoid any relation with cryptocurrencies, which have been outlawed since 2021. Due to this, all NFTs are priced in Chinese RMB, and payments may be made using both conventional tools like credit and debit cards and electronic wallets like WeChat pay and Alipay.
NFTs can only be sold or given away once, in the initial transaction, and once more. This is as a result of worries about connections to cryptocurrency and inflated pricing. In a well-known instance, an NFT with a traditional fresco theme that had a beginning price of 9.9 RMB was resold for 1.5 million RMB. While the legal trading limitations are set, it is up to the platforms to make their own regulations within those restrictions.
Different platforms adopt various strategies that reflect the degree of risk appetite and regulatory pressure they are under. Out of the top 10 significant NFT platforms in China, each has adopted a non-secondary tradable strategy and may occasionally permit gifting. In contrast, the majority of tiny platforms, which make up 56% of all platforms, permit secondary trades. The regulators may modify their attitude to secondary trading in the future, but this is not a given. A prohibition on some of the smaller trading platforms in March 2022 suggests regulators might adopt a more rigid stance in the future.
The Alliance Chain or Private Chain are the names of the blockchains that China has created for itself. These blockchain platforms were created in China by a group of major IT firms. They are not entirely decentralized; each blockchain is run by a single business or small group of people working with government organizations. All users are subject to regulatory procedures to confirm their identity and grant the government access to areas where "illegal activities" are occurring. Separate blockchains sponsored by different states produce a "closed loop system" with no global connectivity.
NFTs are used in a variety of applications, such as the sale of art and the digitization of museum objects. NFTs are typically employed in two ways from the standpoint of brands. In exchange for royalties, brand pictures may be licenced to be created and sold on NFT platforms, either as marketing campaign gifts or by app developers. In general, NFTs have low costs, typically between 50 and 300 RMB. Though possible, prices may not be as high as elsewhere. The first digital collectible created by Chinese great painter Qi Baishi was sold for 300,000 RMB.
Since the recent rapid development of NFTs in China, The Initiative to Prevent Relevant Financial Risks of Non-Fungible Tokens is the first government document with a compliance focus on NFTs. The initiative is not a set of binding regulatory requirements, merely a self-regulatory declaration. However, taking into account the three associations' unique status as official industry self-regulatory bodies, it still symbolizes the regulatory attitude and tendency of supervision to a large extent.
Not only does this provide the first official translation of NFT into Chinese, it also affirms the use of the NFT idea in China and clearly distinguishes it from cryptocurrencies, which are outright forbidden. Additionally, it establishes an NFT as a novel and distinctive use of blockchain technology and affirms that it has a specific value in advancing the growth of China's creative and cultural sectors. It also emphasises that there may be hazards associated with speculating, money laundering, and other illicit financial activities while using NFTs.
The policy suggests adopting a sensible selection of application scenarios and standardising blockchain technology application to fully enable NFTs' beneficial role in advancing a digital economy. It suggests that a true high price that deviates from the fundamental rule of value should be avoided in particular and that the value of NFT items should have an adequate pricing base.
It implies that the underlying assets of an NFTs' intellectual property rights ought to be safeguarded. To safeguard the consumer's right to knowledge, right to make an informed decision, and right to fair trade, NFT product information must be disclosed in a truthful, accurate, and comprehensive manner.
The initiative resolutely seeks to stop any financialization and securitization tendency of NFTs, strictly prevent the risks of illegal financial activities, and proposes six specific codes of compliance conduct:
- It emphasizes that an NFT's underlying assets shouldn't consist of securities, insurance, loans, precious metals, or other financial assets; specifically, NFTs must not be employed in the issuing or trading of any financial goods.
- Any initial coin offering (ICO) activity in the specific form is forbidden. More particular, it prohibits the use of techniques like batching or dividing ownership to weaken the non-fungible properties of NFTs.
- It forbids the establishment of any trading venues that offer centralized trading (centralized bidding, electronic matching, anonymous trading, market maker, etc.), continuous listing trading, standardized contract trading, and other NFT trade services in contravention of the law.
- It expressly forbids the pricing or settlement of NFTs using cryptocurrencies like Bitcoin, ETH, or USDT. It urges processing real-name authentication for NFT issuers, buyers, and sellers - and keeping customer identity information and issuance transaction records properly - while actively cooperating with anti-money laundering work.
- This is consistent with China's current strict prohibitions on cryptocurrencies, where they do not have the same legal status as legal currencies and cannot be circulated in the market as currencies or pricing tools. Operators of NFT platforms should pay close attention to this issue.
Consumers are advised to develop a sound consumption philosophy, strengthen their own defenses, and actively avoid engaging in illegal financial activities. Additionally, the campaign advises people to report any related unlawful activity promptly and aggressively. It is also important to note that the China Communications Industry Association Blockchain Specialized Committee (CCIAPC) and the China Mobile Communications Association Metaverse Consensus Circle (CMCA-MCC) jointly released The Self-Regulatory Requirements on Regulating the Healthy Development of Digital Collection Industry the day after the initiative's launch in response to suggestions. Both the CMCA-MCC and CCIAPC are social organizations registered with the Ministry of Civil Affairs and governed by the Ministry of Industry and Information Technology. As digital collections are based on NFTs and the development is still at an early stage, with unclear value standards, the self-regulatory requirements mainly reiterate relevant requirements in the initiative and propose reasonable expectations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.