China prosecutors to crack down on NFTs used as crypto proxies

Get all important market news and expert opinions in one place with our daily newsletter. Receive a comprehensive summary of today’s top stories straight to your inbox. Sign up here!

(Kitco News) – China’s National Prosecution Bureau published a new set of non-fungible token (NFT) guidelines on May 15, warning that NFTs are being used as a proxy for illegal securities and speculative digital assets.

The guidelines from the Supreme Procuratorate of the People’s Republic of China recommend stronger “risk research and judgment” to distinguish between “genuine innovation” NFTs and quasi-crypto “pseudo-innovation”, stressing the need to “accurately punish crimes” when uncovered.

“While [NFT] has high popularity, it is very likely to cause financial risks, management risks, network security risks, etc., and especially legal risks,” they wrote. – The public prosecutor’s office is following closely.

NFTs have existed in a legal gray area since China moved to make cryptocurrencies illegal in September 2021. As a result, the domestic NFT market in China is largely self-regulated by the industry.

Prosecutors acknowledged that “as a new application of blockchain technology, NFT has some development potential.” However, they also saw a tendency towards “securitization” of NFTs where ownership of one token or collection was shared between multiple individuals, which they claim violated proper NFT criteria such as non-reproducibility, indivisibility and uniqueness.

“From a property rights perspective, 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,” the report states. . “What consumers enjoy is only an exclusive right to prohibit others from tampering with the ownership of NFTs registered on the blockchain.”

This position on NFT ownership appears to be at odds with the landmark December 5 ruling by the Hangzhou Internet Court, which ruled that non-fungible tokens (NFTs) constitute online virtual property and are recognized under Chinese law.

The court found that NFTs “have the object characteristics of property rights such as value, scarcity, controllability, and tradability” and “belong to virtual network property,” meaning they “should be protected by the laws of our country.” Their definition of NFTs set an important and far-reaching precedent for digital property in China, further distinguishing NFTs from cryptocurrencies and other prohibited digital assets.

But on March 14, the Chinese government released a report showing a 30,000% increase in complaints of NFT fraud and price manipulation between 2021 and 2022.

According to the report from the State Administration for Market Regulation, 59,700 NFT-related complaints were logged in 2022, up from 198 in 2021. Most of the complaints concerned non-receipt of goods after purchase, refund problems, price manipulation and high transaction fees.

The lack of clear regulation is hurting China’s NFT industry, as evidenced by the fact that Huanhe, the regulated NFT marketplace of Tencent Holdings, will shut down in June and has already started the process of refunding users. Other NFT platforms are moving their operations to Hong Kong, which has taken a more open approach to digital assets.

On January 1, China launched the first legal-compliant secondary trading platform for digital assets across the country. China Digital Asset Trading Platform (CDATP) was jointly built by state-owned China Technology Exchange and China Cultural Relics Exchange Center in cooperation with Huaban Digital Copyright Service Center, a private company.

Yu Jianing, co-chairman of the Special Blockchain Committee of China Communications Industry Association, said that the launch of CDATP shows that the growth rate of asset digitization is increasing, but he also acknowledged that digital assets in China are facing several problems, such as such as technical limitations, collector’s value and copyright disputes.

“In terms of industry oversight and compliance, digital collections is a new type of business, and laws, regulations and regulatory guidelines will gradually improve, so there are some uncertainties,” Yu said. “The platforms have clear responsibilities for issuing and trading digital collections. Compared to intellectual property rights and digital copyrights, digital collections face greater compliance risks.”