China on NFTs: “The prosecutor’s office is watching closely”

Chinese prosecutors have released a report examining the legal characteristics and risks of non-fungible tokens (NFTs). The move comes as these digital assets remain a gray area despite the growing popularity of NFTs and digital art in China.

Chinese officials are exploring risks associated with NFTs

On Monday, the People’s Republic of China’s top authority published a report on the legal characteristics of NFTs and risks associated with this emerging asset class. The report acknowledged that “relevant legal norms and regulatory rules” are not yet in place because it is a growing field.

“Although it has high popularity, it is very likely to cause financial risks, management risks, network security risks, etc., especially the legal risks. Prosecutors are watching closely.”

Specifically, the report noted that some digital collections use marketing methods such as airdrops, mystery boxes or limited sales to increase prices. “There is no reasonable price mechanism and sufficient value support behind the inflated prices, and it is easy to deviate from the fundamental law of value, leading to the accelerated formation of market bubbles.”

The authors also mentioned the risk of fraud, arguing that a digital collection could make illegal profits through false issuance and price manipulation. Furthermore, attitudes where an NFT collection offers incentives such as “newcomer discounts” increase the risk of pyramid schemes.

“Additionally, digital collections are often bundled with concepts such as metaverse and blockchain to attract new users. Marketing models such as rewards and dynamic rights and interests can easily develop into illegal pyramid schemes that use the number of development personnel as remuneration or discounts.”

Another concern is the potential for illegal fundraising. Digital collections can motivate buyers by offering fixed returns, stock options, buybacks and physical cash rewards. The report said such methods could be considered illegal to collect public deposits without authorization and to commit fraud with funds.

One author also raised concerns about property rights related to NFTs. “Consumers do not enjoy ownership of the NFT digital assets they purchase in a civil law sense, and consumers cannot prohibit others from accessing, copying or disseminating the digital assets mapped by the NFT,” he said.

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Chinese prosecutors outline methods to deal with NFT risks

The prosecutor’s office said the possible legal risks of NFTs had received attention. “All types of financial activities must be brought under supervision in accordance with the law,” the authors wrote, outlining some steps that could help officials tackle challenges with NFTs.

First, the report proposed a crackdown on criminal activities committed under the guise of new technology. The authors noted that officials must protect “genuine innovation” while fighting crimes committed in the name of innovation.

“The prosecutorial bodies must be good at grasping precisely the boundaries between innovation and development and crimes, and must not only protect “real innovation” in accordance with the law, but also be able to quickly detect and accurately punish those who commit crimes in the name of Innovation.”

The report added that regulatory agencies need to bring new assets such as NFTs under supervision and give prosecutorial bodies related powers to prevent crime and promote social governance. They must also “actively promote relevant prosecutorial proposals.”

“The third is to strengthen risk research and judgment,” the report said, suggesting that officials conduct a thorough analysis of current regulatory risks and hidden dangers of NFTs. The authorities must also study the economic and social risks involved in the development of new technologies and provide advice on the prevention of financial risk and the improvement of the regulatory system.

China sees massive spikes in NFT-related complaints

As reported, China has seen a sharp increase in NFT-related complaints over the past year. Chinese users filed 59,700 complaints about NFTs in 2022, a 30,000% increase compared to the previous year, which saw less than 200 complaints regarding digital collections.

The complaints were mainly focused on non-delivery of purchased items, non-refunds, malicious price gouging, high fees and random banning of consumer accounts. The report noted that oversight would become more difficult with new fields such as digital collections.

NFTs are still a gray area in China. Despite imposing a blanket ban on cryptocurrencies, the Chinese government offers some leeway for digital collectibles to exist as long as they do not involve crypto-assets such as Bitcoin and Ethereum.

Last year, however, Beijing imposed a strict ban on secondary markets for digital collectibles. The harsh stance has already hurt the industry, forcing some NFT marketplaces to close.

Do you think China might ban NFTs too? Let us know in the comments below.

About the author

Ruholamin Haqshanas is an accomplished crypto and financial journalist with over two years of experience writing in the field. He has a solid grasp of various segments of the FinTech space, including the decentralized iteration of financial systems (DeFi), and the emerging market for non-fungible tokens (NFT). He is an active user of digital assets for money transfers.