China NFTs

How Does China View NFTs and What Are its Market Prospects: Who are the major players, and what makes them different?

Tiantian Wang and Yihan Zang from our joint operation partner, Shanghai Lang Yue law firm, are also key contributors to this publication

1. Non-Fungible Tokens (NFTs) are embraced in China

NFTs have become a growing phenomenon in China as in many other places around the world since 2021. This is in spite of an unfavourable regulatory environment towards cryptocurrencies, which are also derived from blockchain technology.

China NFTs

Latest developments at a glance

According to a list published by the Cybersecurity Administration of China (CAC) on 3 March 2022, an NFT issuance / incubation platform has become one of the latest market players to complete filings to be a “blockchain-based information service provider.” This clarifies the applicability of China’s developing blockchain regulatory regime to NFT businesses.

NFT market players in China are not limited to private-sector enterprises – some players could also have a government background. The former includes such tech giants as Tencent, Alibaba and Baidu, which have launched their NFT marketplaces. The latter includes Xinhua News Agency and China Central Television, which have developed and issued their NFT products, and government-sponsored cultural artwork exchanges seeking to set up online trading platforms for NFT-based digital artworks.

2. Definancialisation

While the Chinese government is not hostile to the concept of NFTs per se, it is clear that the Chinese government will have zero tolerance for their financial use.

On 13 April 2022, industrial associations including the National Internet Finance Association of China, the China Banking Association, and the Securities Association of China jointly issued the Proposals on Preventing NFT-related Financial Risks (the Proposals), which set forth some basic principles for NFT-related businesses, with a focus on rebuffing the attempts to financialise or securitise NFTs. While these industrial associations are not government regulators and the Proposals have no legal effect, the Proposals may be seen as “testing the water” and may shed some light on future legislative direction.

Many key onshore market players have adopted the following measures to minimise the financial attributes of NFTs, in order to not be considered as engaging in illegal securities issuance, fundraising or exchange business, or violating the cryptocurrency and ICO ban in general:

  • tokenising artworks on the consortium blockchain rather than the public blockchain;
  • referring NFT products as “virtual collectibles” instead of “tokens” to avoid the apparent association with cryptocurrencies;
  • prohibiting the use of cryptocurrencies for transactions of NFT products;
  • suspending secondary trading of NFT products for the time being; and
  • prohibiting any fractionisation of NFT products.

Some of the measures (such as the ban on secondary trading) may be relaxed or lifted as the regulatory framework on NFTs evolves. However, many others are expected to stay as standard industrial practices.

Foreign market players are advised to adopt the same measures to the extent possible when providing NFT-related services to Chinese residents, or those engaging in NFT businesses in China, to avoid being on the radar of PRC regulators.

3. Anti-Money Laundering (AML)

Another important aspect that the Chinese government is particularly wary of is the money-laundering risks arising from NFTs.

As to the Chinese onshore NFT market, such risk is indirectly controlled by the effort to definancialise NFTs, especially by limiting payments to be made through banks or licensed third-party payment companies that are AML-obligated persons. The risk is further reduced by the market practices to make NFTs analogous to “collectibles” as opposed to financial assets. However, foreign market players that intend to provide NFT-related services to Chinese residents on a cross-border basis should also be aware of the potential extraterritorial effect of the PRC AML laws, particularly the criminal laws. For the sake of prudence, foreign market players that intend to provide NFT-related services to Chinese residents are advised to follow the same approach adopted in relation to the Chinese domestic market when doing so.

See also  Digital Marketing Guide for Crypto and Blockchain WEB 3.0 Companies

4. Blockchain regulation

In early 2019, the CAC issued the Administrative Provisions on Blockchain-Based Information Services (the Blockchain Provisions) as the foundational regulation governing blockchain. As stated above, the Blockchain Provisions are relevant because blockchain is the underlying technology of the NFTs.

The Blockchain Provisions govern “blockchain-based information services carried out in China,” and subject “blockchain-based information service providers” to a series of regulatory requirements, including in particular the completion of post filings with the CAC within ten business days from the commencement of the services, and the need to receive security assessments when launching new products, new applications or new features. To elaborate, “blockchain-based information service providers” refer to persons that provide blockchain-based information services to the public or the nodes through which such services are provided, and the organisations or institutions that provide the aforementioned persons with technology support. From this definition, however, it is not entirely clear if a foreign blockchain service provider with no China nexus other than having PRC residents as users may be captured by the Blockchain Provisions. We will closely monitor any clarification in this regard.

5. IP and data considerations

Given that many NFTs link to copyrighted works (including images, music and artwork), their creation, distribution and commercialization raise IP issues. Notably, a Chinese court recently handed down the country’s first copyright infringement case involving a NFT digital work.  NFT platforms should be aware of their potential liability, as at least one Chinese court has imposed a general obligation of preliminary IP review and monitoring of NFT works on their platforms.

China has a complex, overlapping regulatory regime concerning data protection and cybersecurity. Foreign market players that intend to provide NFT related services to Chinese residents should also carefully assess their obligations under PRC data protection legislations. Please refer to our offerings on the China Data Regime.

Key players in the Chinese NFT space

Most Chinese NFT platforms are built on consortium blockchains or Blockchain-as-a-Service (Bass) infrastructure, giving companies and organizations authority to govern the platform. This is in direct contrast to popular global NFT platforms, which are built on public blockchains, meaning that they are permissionless, allow anyone to join, and are decentralized in nature, such as Ethereum or Solana.

The most significant difference between NFT projects in China and the international market lies in this concept of decentralization, where decision-making power is taken from one centralized entity and given to member-owned communities, known as Decentralized Autonomous Organizations (DAOs). While there’s continued debate about the actual degree of decentralization of projects within the international community, with many projects working towards full decentralization, China’s NFT market strictly follows the country’s laws and regulations, and its projects are overwhelmingly centralized.

BSN: BSN-DDC

China’s state-backed blockchain infrastructure Blockchain Services Network (BSN) released on Jan. 24 its own NFT infrastructure called BSN-DDC, short for Blockchain Services Network Distributed Digital Certificate.

BSN-DDC provides companies with blockchain infrastructure to build their own NFT platforms that comply with Chinese regulations.

The infrastructure has integrated 10 public blockchains, including Algorand, Cosmos, Ethereum, Polkadot, Tezos, and Nervos. These integrated versions of public blockchain work differently from their original versions: they set restrictions on who can govern the blockchain, identify all participants, and use fiat currency for payments instead of cryptocurrency.

Ant Group: JingTan (Topnod)

Alibaba’s fintech affiliate Ant Group launched its digital collectible platform AntChain Fan Points last June, which was renamed Topnod (Jingtan in Chinese) last December. The platform runs on a consortium blockchain built by AntChain, Ant’s blockchain arm.

See also  How to create an API key on Bybit

Users are not allowed to resell digital collectibles bought on Topnod, and can only gift them to authenticated users after holding them for more than 180 days.

Collections on the platform often have a price range of RMB 20-30 (about $3 to $5) and a limited collectible count of 8,000 to 10,000. The platform uses its own payment system on Alipay, one of mainland China’s two main cashless payment companies. All users need to complete real-name identity verification and transact with fiat currency.

The platform boasts a fast and cheap transaction speed. “Topnod was able to provide a technical capability to process 100,000 digital collectible transactions per second during a Spring Festival digital campaign in 2022. This leads the consortium blockchain industry,” a Topnod spokesperson said.

Topnod works with various national museums in China to produce digital versions of historical relics. They also work with painters, ethnic minority embroidery artists, and more. Topnod recently collaborated with the Shanghai Symphony Orchestra, releasing 10,000 pieces of audio collectibles from the earliest symphony phonographic record in China, priced at RMB 19.9 ($3.15) apiece. The collection featured two pieces of the 1929 recording from the Spanish composer Manuel de Falla’s ballet piece El amor brujo.

Tencent: Huanhe

Tencent’s digital collectible platform Huanhe is built on Tencent’s Zxin Chain, a government-authorized enterprise blockchain network, and has a more diverse collection when compared to Topnod. Huanhe works with museums, well-known artists, auto brands, consumer product brands, and charity organizations to release various digital works.

Chinese platforms often use digital collectibles to promote cultural heritage and accelerate the digitization of the cultural and museum industries. For example, Huanhe offers digital versions of murals from the famed Dunhuang Mogao Grottoes, at RMB 118 apiece ($18), around the same price as a digital painting by the famous painter Qi Baishi, as well as other ancient Chinese artworks.

Huanhe also works with consumer brands, such as car companies or household consumer product companies, to release digital collectibles. These collectibles are often free and lottery-based and serve primarily as a marketing tool for these brands. For example, Chinese household paper brand Qingfeng released a free collection of five different 3D flower artworks, which attracted 14,154 participants in the lottery.

Another collection from The Imperial Palace Museum’s cosmetic brand offered limited editions of digital collectibles if people purchase a physical cosmetic product.

All digital artworks purchased from Huanhe can be displayed in the user’s own 3D virtual gallery inside the app. And similar to other Chinese digital collectible platforms, Huanhe doesn’t support secondary trading.

NFTCN marketplace

NFTCN, unlike other digital collectible platforms in the China market, is a marketplace for independent artists and collectors to create, sell and collect NFTs. The marketplace sells digital and physical art using NFTs, with a built-in gallery to exhibit user collections. According to its website, the marketplace uses back-end technology that is based on a side chain of Ethereum, without any further elaboration.

Buyers transact on the platform by purchasing special cards from the website in fiat currency to avoid crypto transactions. Unlike other Chinese NFT marketplaces, NFTCN actually has a secondary marketplace where collectors can resell their collections. For example, an item named “Violent Goose #78” was first sold at RMB 599 ($94.79) on March 7, then resold for more than double the price the following day.

Comparing the Chinese NFT market to the rest of the world

Investing with regulatory risk

Although Chinese regulations bar people from reselling and trading NFTs and digital collectibles, many collectors still hope for capital gains from these purchases in the future as policy changes.

In February, a group member from a private Topnod collector WeChat group commented with enthusiasm after a successful digital collectible purchase on the platform, “still waiting for a secondary market for Topnod,” as seen by the author.

See also  10 Best Browsers & APP For Crypto Trading – Safest Crypto Web Browsers

Collectors in China have also made efforts to get around the NFT trading bans. Last June, a Dunhuang digital collection part of the inaugural sale on Ant Group’s platform quickly sold out. The collection was originally priced at around RMB 10 ($1.58). Buyers immediately put the collection on a second-hand trading platform called Xianyu, asking for around RMB 100,000, with one listing asking for RMB 1.5 million. The platform quickly took down NFT-related products and blocked “NFT” in search results.

In February, as some collectors approached the 180-day holding period set by Chinese platforms, some were looking for ways to sell their ability to “gift” collections. Ant’s Topnod announced in late February that it had punished 56 users who tried to trade their collection by trading their rights to “gift” the collection.

Digital property rights

NFT’s immutable nature, which inherently creates digital property rights, gives it more value over other forms of digital media like a JPEG. Suppose the developer of a decentralized NFT marketplace, developed on a decentralized public blockchain, decides to abandon the project. In that case, the NFTs released by that marketplace will still live on the public chain. For example, Hic et nunc, a Tezos-based NFT marketplace, discontinued its service last November, but all NFTs released are still available on the Tezos blockchain.

But things could be different for Chinese NFT marketplaces, mostly built on non-public blockchains. Users have digital property rights as long as the platform maintains its blockchain. Still, but they can lose their rights to access those digital purchases if other governing parties decide to discontinue the blockchain.

In addition, the NFT community believes that NFTs play an important role in building the metaverse, an immersive 3D virtual space. Some collectors are betting on the Chinese NFT market to go through a profitable phase in a controlled, centralized way, as they watch prices of virtual land, virtual events, and virtual clothes rise rapidly on global NFT markets.

 

Potential risks with NFTs

The creator of “Everydays: The First 5000 Days”, which was sold for $69.34 million, was blunt in an interview: The price of NFT is undoubtedly a bubble.

The NFT bubble is down to the illusion of scarcity and ownership. The value of NFTs is determined by market consensus, with a certain number of users agreeing that its properties will have value. If the market does not recognize it, there is no practical value.

In addition, the inability to confirm the ownership of the source assets is also a problem that needs to be considered. Blockchain technology can trace the source of the digital content that has been on the chain to ensure its authenticity and ownership.

Yet, due to loopholes in the confirmation of asset rights before being cast into NFT, the possibility of copying by others cannot be ruled out. This also means that NFT does not really realize the assetization of digital content, and users only have the right to use, not ownership.

Hot take

NFT is a new product and a new field, towards which the Chinese government tends to maintain a cautious attitude. If the market wants NFT in China to have a future, then the technology must be kept away from efforts at financialization.

As mentioned earlier, the weaker the financial attributes, the easier it is to comply with the law. After all, whether NFT in China is worth investing in depends on whether the de-financialized NFT can retain its value while being recognized by regulators at the same time.

Leave a Reply

Your email address will not be published. Required fields are marked *