Non-fungible tokens – or “NFTs” – have consistently been in the news lately, first for their meteoric rise in popularity and then for their equally precipitous setbacks, which include falling prices, “rug pull”-prompted lawsuits, and probes by regulators like the U.S. Securities and Exchange Commission. While legislative activity and regulatory investigations have followed NFTs every step of the way, including in markets like the U.S. and China, it is worth noting that the market and regulatory environment for NFTs in China have evolved quite differently than in many other regions.
As of 2021, China completely banned the production and trading of cryptocurrencies. Because NFTs rely on the same blockchain technology and are often associated with cryptocurrencies, many observers expected NFTs to be lumped in with this ban, but that has not been the case. NFTs remain in circulation in China, and there are several prominent platforms for their minting and purchase (but not trading), always under the label of “digital collectibles” instead of “tokens” in order to emphasize their non-tradable and non-currency status. (Terminology is shifting to some extent in the U.S., as well, away from “NFTs” towards “Collectible Avatars,” “digital collectibles,” “virtual assets,” etc.)
Although, the long-term legal status of NFTs in China remains somewhat ambiguous, and this has not stopped companies from successfully using NFTs in marketing campaigns, seemingly without legal issues.
China’s regulatory regime for virtual assets is still evolving. On the one hand, virtual assets are clearly protected as civil property under the Civil Code, which serves as the legal basis for a Chinese resident to own digital assets, including digital coins and tokens. On the other hand, virtual coins/cryptocurrency initial offerings, trading, and speculation are strictly prohibited, under the September 15, 2021 Circular on Further Preventing and Handling the Risk of Speculation in Virtual Currency Transactions, issued by the People’s Bank of China, together with nine other governmental departments. This notice bans the use or circulation of virtual currencies in the market as currency, along with virtually all virtual currency transactions. It also states that it is illegal for overseas cryptocurrency exchanges to provide these services to Chinese residents.
However, this notice and other related laws do not directly address NFTs, and do not explicitly include NFTs within the scope of banned “virtual currency.” Moreover, general blockchain technology (without currency features) is allowed and even encouraged in China, along with other general use security and cryptography technologies, such as under the Administrative Provisions on Block Chain Information Services issued by the CAC on September 10, 2019. Those provisions define encouraged “block chain information services” very broadly as “information services provided for the public based on block chain technology or systems.”
In this context, several of China’s most prominent NFT issuance/incubation platforms, such as Jingtan and The One Art, have successfully applied to be recognized as qualified “blockchain-based information service providers” under those provisions. This is not definitive, but it does indicate some acceptance by the PRC authorities of non-currency NFT activities as legitimate.
Still, preventing NFT-related risks (especially trading and speculation) is a key concern for China’s regulators and related stakeholders. For example, on April 13, 2022, several industrial associations including the National Internet Finance Association, Securities Association, and the China Banking Association jointly issued Proposals on Preventing NFT-related Financial Risks, which prominently includes a commitment by members of these three associations to refrain from financializing or securitizing NFTs, and to refrain from providing trading services or related financial services for NFTs in any form. This is softer than a similar ban would be if embodied in formal legislation, butm nevertheless, it flags the government’s stance on this issue (NFTs shall not be traded or used as any kind of financial instrument), and the industry in China has largely aligned its practices with this norm.
At the same time, NFTs are also being promoted in other contexts, including as an IP protection tool. For example, Shanghai’s 14th Five Year Plan for Digital Economy Development (June 2022) includes support for companies researching the use of NFTs and related digital assets to enhance the global circulation of digital intellectual property and digital authentication of ownership.
Given above regulatory regime, NFTs in China are created and managed differently than in the rest of the world. In almost all cases, they are labeled as “digital collectibles” instead of “tokens” in order to emphasize their non-tradable and non-currency status. Additionally, such NFTs are not operated on a public block chain, but rather on the private block chain of the respective issuing platform. Finally, these platforms explicitly ban trading or re-sale of the NFTs they issue, subject to a few narrow exceptions.
These limitations have presented challenges for some NFT platforms in China. Recently, Tencent’s NFT platform Huanhe announced that it would no long release any new digital collectibles and would continue to operate only as a legacy storage platform for existing users’ NFTs. It also said that existing users could continue to hold and display their current NFTs or request a refund from Huanhe.
Other platforms continue to operate and are trying to meet users’ demands for liquidity despite the general ban on trading. For example, the Jingtan app operated by Alibaba now allows users to “exchange” items in their collection by “re-gifting” digital collectibles after 180 days of ownership, with a two-year lock up (no sale agreement) applying to the recipient of the re-gift. This creates obvious opportunities for back-channel payments for such “re-gifting,” so Jingtian says that if it detects any evidence of payment for such exchanges, it will suspend or close the users account, which presumably also results in the forfeiture of any NFTs held in such account (since such NFTs would be held on Jingtian’s own blockchain, and not directly held by the user).
Although long-term legal status of NFTs in China remains somewhat ambiguous, this has not stopped companies from successfully using NFTs in marketing campaigns, seemingly without legal issues. Recently, Tmall hosted an online event it called the Metaverse Environmental Protection Auto Show, promoting the launch of eight electric vehicle brands, with users able to obtain NFTs of those brands by lottery as part of the promotion. McDonald’s also ran an NFT promotion, allowing customers to use points from the purchase of the Maimaikazi Crispy Chicken Thigh Burger (麦麦咔滋脆鸡腿堡) to redeem a related NFT through the McDonald’s app, WeChat, and Alipay.
Given this context, brands may still be able to use NFTs successfully in their promotions in China but should proceed with caution.
Global approaches to NFTs will not work, and may be illegal, even while the unique Chinese NFT ecosystem presents new opportunities for creative marketing. Key guardrails for brands considering NFT campaigns in China should include: (i) use legally registered Chinese NFT platforms; (ii) describe NFTs in China as “digital collectibles,” not as “tokens” and never as “currency;” and (iii) do not allow or encourage any trading or speculation in NFTs, or imply that NFTs may increase in value or can be used as currency.
Justina Zhang is a Senior Partner at TransAsia Lawyers. She has extensive experience in the technology, media and telecom industry, as well as intellectual property protection and advertising.
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