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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.

China has struggled to tamp down underground banks, loan sharking, and shadow banking activities, and NFTs provide the public with a potential new channel for raising funds, legally or illegally.

China took a similar position on cryptocurrency, banning the use of Bitcoin and other virtual currencies. Cryptocurrency transactions and initial coin offerings (ICOs) have been banned, and large banks have been asked to crack down on cryptocurrency speculation.

Crypto mining operations have been subject to crackdown and ban, with such operations moving out of their home provinces or even out of the country.

China’s stance on new finance may be rational. Indeed, it may be wise for China to sit out the volatility and irrationality pervasive in the cryptocurrency and NFT markets.

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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.

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.

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The new infrastructure, dubbed BSN-Distributed Digital Certificate (BSN-DDC), would provide an application programming interface for organizations or individuals to construct their own user portal or application for NFT management.

He is quite optimistic about the future of NFTs in China, predicting that NFTs in China will number in the billions per year.

A Hopeless Problem for Central Planners

NFTs have recently emerged on public blockchains, allowing for the production of one-of-a-kind digital objects that may be owned, traded, and exchanged decentralized.

While the underlying technology of NFTs generally share some similarities to cryptocurrencies, they are not intended to function as a form of currency nor are they designed to be used as a store of value.

However, due to their open-source nature, public chains are illegal in China.

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China is reportedly planning to launch its own infrastructure to support the deployment of NFTs in an attempt to create an industry not linked to cryptocurrencies.

A South China Morning Post said state-backed Blockchain Services Network would create the infrastructure “BSN-Distributed Digital Certificate” (BSN-DDC) to differentiate it from crypto-transacted NFTs. Currently, all cryptocurrency transactions are illegal in China.
The new infrastructure will offer application programming interfaces for companies and individuals, enabling them to build their own user portals or apps to manage NFTs.

SCMP said only renminbi is allowed for purchases and service fees on this platform.

Public chains are not legal in China as the country requires Internet systems to verify user identities and allow regulators to intervene in illegal activities.

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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.

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For regulatory compliance considerations, they refer to digital collections rather than “NFTs.”

Hey – What Happened to Jack Ma?

Ant Group, Alibaba Group Holding’s financial technology (fintech) subsidiary, and Tencent Holdings were the first Chinese tech giants to embrace NFT, offering a multitude of products.

JD.com and Baidu are the next that joined the bandwagon, launching their own digital collections.

The BSN-DDC infrastructure has the ability to upend the existing NFT sector. It has over 20 partners, including blockchain network Cosmos, digital receipt system manufacturer Baiwang, and video technology service provider Sumavision.

According to He, as compared to other single-company platforms, BSN-DDC is cross-chain interoperable and less expensive, with NFT issuance costing as little as 0.05 yuan.

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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.

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.

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.

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.

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