NFTs or non-fungible tokens are a new type of digital asset that is steadily gaining popularity and dominating online media conversations around the world. In this article, we look at the status of NFTs in China. While Chinese regulators do not object to NFTs as a concept, authorities do not appear as enthusiastic over its financial use. China is also opposed to any technology function engaged in the domain of cryptocurrency.
NFT was probably the most popular word in 2021, and this phenomenon continues into 2022. Global search interest for ‘NFT’ surpassed ‘Crypto’ for the first time in 2022, Google Trends data reveals, reflecting the fact that it has now entered mainstream consciousness.
China has not been left out. In China, NFT are referred to as ‘digital collectibles’ rather than ‘tokens’ since the Chinese government is opposed to cryptocurrency. A cryptocurrency is a digital or virtual currency that is protected by cryptography, making counterfeiting and double-spending practically impossible. However, cryptocurrencies are notorious for their unpredictable values, which encourages speculation, and may create new avenues for money laundering and capital outflows. As a result, China has cracked down on cryptocurrencies since 2020.
Nevertheless, Alibaba and Tencent, two of China’s leading technology corporations, are investing heavily in the NFTs market, despite its close links to crypto in Western markets. This shows that Chinese public interest in the NFT market is growing, and the Chinese government does not intend to hinder this – so long as NFT technology does not facilitate cryptocurrency transactions.
A non-fungible token (NFT) is a one-of-a-kind piece of data that is tracked on a blockchain ledger. This new technology ensures the token’s uniqueness while also providing security features for the creation’s conservation or exchange.
The most well-known application of this technology thus far has been as an ownership certificate for a digital asset. NFTs include everything from autographed tweets to media that can be verified using blockchain technology, such as a photograph, a painting, a song, a video, or even an emoji. Unlike most virtual content, which may be copied indefinitely, NFTs are one-of-a-kind digital artifacts.
For example, a file Beeple from famous digital artist Mike Winklemann who took 14 years to finally put together 5,000 pictures into a 316 MB file “Everydays: The First 5000 Days” was auctioned by Christie’s as an NFT for a sky-high price of US$ 69.34 million.
An NFT can be an investment outside of China. However, as of writing this article, China has downplayed the financial aspects of NFTs. The creators of NFTs in China have not yet opened an official or unofficial secondary market for such tokens due to a series of administrative regulations introduced in the country.
In June 2021, Alibaba was quick to ban NFTs from resale on its second-hand market (Xianyu) when they discovered that one of its NFT products was being resold at several thousand times the original price.
The closure of the secondary market is intended to keep the enthusiasm around NFT products and their metamorphosis into financial products to a minimum. But according to analyst, the closure of the secondary market should only be temporary. After laws and regulations regarding NFT become clearer and more certain, there is still a chance that NFTs can be freely traded in China and buyers get their investment value back.
A slew of leading Chinese companies have jumped on the NFT bandwagon, including big tech, blockchain startups, art auction houses, and retail brands, and their participation has stoked the NFT fervor even more. In June 2021, Alipay launched 8,000 limited-edition NFTs in China, based on two pieces of ancient artwork from the Dunhuang Caves. The cave houses some of the finest specimens of Buddhist art from over a thousand years ago, and these goods sold quickly. In early August 2021, Tencent, China’s largest social media and gaming company, developed an NFT purchase and collection trading platform (Huanhe). To date, the platform has sold two batches of audio and artwork NFTs, both of which sold in less than a second after becoming available to the public.
China’s NFT players can be roughly divided into two categories.
The first category is based on the “alliance chain” (a form of blockchain in China) built by big technology companies, which mainly focus on the collection function of NFT and does not support the function of token trading. NFTs offered by these companies are created by designated artists / creators as per the company requirements. The NFT work created by individuals cannot be traded on the company’s platform. The buyers can collect the NFT product, enjoy it, show it to friends, or give it away with restrictions – but they cannot resell the NFT products. Alibaba and Tencent belongs to this category. Both organizations claim that the NFT artworks they sell are created on their separate alliance chains, called AntChain, a type of hybrid blockchain that isn’t totally decentralized but is managed by a selected group of members and in collaboration with some government agencies. To hedge against current policy risks, it is backed by the actual value of digital commodities and lacks currency features like payment processing.
The second category refers to NFT trading platforms. These platforms have comprehensive functions and there is a high threshold for ordinary users to issue NFT here. NFT trading platforms are open to individual artists, but they can only upload a certain amount of their work (for example, 20 copies). An NFT trading platform currently supports various distribution modes, such as blind box distribution, auction, and pricing. In addition to selling on the platform’s own marketplace, creators can also sync their works to several of the largest overseas marketplaces, such as OpenSea and Rarible, to address liquidity issues. NFTCN, one of the most popular digital art marketplaces, belongs to this second category. Unlike the NFT based on alliance chains, NFTCN uses the Ethereum public chain, which is currently the first and only decentralized digital asset trading platform in China. This ensures that digital assets are permanently stored on the blockchain, maintaining the persistence and immutability of digital assets. NFTCN is now working to build a content ecosystem. It launched NFTCN STUDIO in July 2021 to support artists in all aspects, including IP incubation, daily operation, and cooperation in other aspects. Even though it was only founded in May that year, the NFTCN marketplace, which is operated by Hangzhou-based software firm Bigverse, has over 800,000 registered users worldwide and works with over 80,000 artists.
China’s state-backed Blockchain Services Network (BSN), which aims to provide infrastructure to facilitate the deployment of NFTs, will be launched by the end of January 2022. It is regarded as a key step toward establishing a Chinese NFT economy apart from cryptocurrencies. He Yifan, Director of Red Date Technology, which offers technical assistance to BSN, believes that NFTs “have no legal issue in China” provided they avoid cryptocurrencies like bitcoin.
To distinguish China’s NFT from crypto-transacted NFTs, the BSN-Distributed Digital Certificate (BSN-DDC) infrastructure will provide application programming interfaces for enterprises or people to create their own user portals or apps to manage NFTs. For purchases and service fees, only the Chinese yuan is accepted.
Also, according China CCTV News, three of China’s largest IT companies have signed a self-regulatory vow to keep their booming NFT markets away from cryptocurrencies and avoid the language used by their western counterparts.
The “Digital Culture and Creative Industries Self-Regulation Convention,” which was signed by Tencent, JD, and Alibaba recently, is made up of 11 criteria that coincide with Beijing’s broader aims for the digital economy. They include, among other things, “preventing money laundering, promising dissociation from virtual currency, protecting consumer rights, and promoting national culture.”
Besides, the virtual marketplaces of Alibaba and Tencent have opted to downplay the links between their NFT collections and cryptocurrencies by dubbing them “virtual collectibles” and avoiding the use of the word “NFT.”
Whether to use crypto payment methods is crucial because blockchain and crypto receive entirely different treatments at the hands of Chinese regulators. Blockchain was identified as one of the key technology areas for China’s 14th Five Year Plan — the country’s most crucial economic strategy — providing it instant credibility and increased stature.
In contrast, crypto activities were banned entirely and cleared out of the country. This means that no matter how close the technology is, blockchain companies must aggressively disassociate themselves from crypto-oriented activity in their brands in order to survive and even grow.
The end consequence is that the majority of NFT transactions in China are decoupled from cryptocurrencies. All NFTs are denominated directly in RMB, with the transactions being made via traditional non-crypto means, such as bank cards, Alipay, and WeChat Pay.
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.
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.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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