China’s NFT platforms expand to Hong Kong in the face of mainland compliance risks
Non-fungible token (NFT) platforms in China are expanding into Hong Kong to offset compliance risks for an industry that remains in a legal gray area on the mainland. It helps that the city has rolled out a welcome mat for digital asset industries.
ShucangCN, an NFT platform that launched in January 2022 in China to quickly become one of the biggest players, has set up NFT China Ltd., a decision its CEO said he made after the territory released crypto-friendly policy documents in October.
“We are about to launch a simple NFT platform in Hong Kong in about two weeks that can facilitate NFT airdrops,” Pengfei Wang, CEO of ShucangCN, told me. Discard in a phone interview Thursday. Sales and commerce functions will follow as the team sets up payment routes, he said.
Yifan He, head of Red Date Technology, the developer of the state-backed blockchain infrastructure Blockchain-based Service Network, said in an interview that mainland clients who built BSN-level NFT platforms are moving to Hong Kong, and “they are discussing with our Hong Kong team to build their platforms there.”
China banned cryptocurrency transactions in 2021, but Hong Kong, in contrast, has set up a new licensing regime that could eventually extend to retail cryptocurrency trading. Current regulations in Hong Kong, a special administrative region of China, only allow institutions and professional investors with portfolios of USD 1 million or more to trade digital assets.
Although Chinese regulators have yet to set hard and fast rules for NFTs, state media have attacked “speculative behavior” in the sector. But that hasn’t stopped China’s consumers from buying and trading digital collectibles, and many platforms, including ShucangCN, offer such services.
Make Money
By 2022, ShucangCN had about 30 million yuan ($4.5 million) in revenue with a gross profit margin of 30%, CEO Wang said. In June, it launched its main NFT trading platform Huashu Wenchuang in cooperation with the Chinese cultural stock exchange Huaren Exchange Center of Culture Property, a platform that usually trades property rights and ownership of traditional works of art, and saw tens of millions of yuan of NFT traded through the end of last year, according to Wang.
Tony Fu, head of ShucangCN’s Hong Kong unit, said Discard that secondary trading remains in legal limbo on the mainland, which could bring compliance issues in the future, hence the plan “to set up a secondary trading platform in Hong Kong.”
He said in Red Date that Chinese regulators are particularly strict about businesses that come up with unauthorized capital pools, as the practice often carries high risks for investors. But to earn commissions, NFT trading platforms process transactions through capital pools, he added.
“All cultural stock exchanges that operate secondary trading are all against the law, as they do not have licenses to operate secondary market businesses with capital pools involved,” he said.
The Hong Kong Platform
ShucangCN’s future Hong Kong platform will allow mainland users to transfer their “digital collectibles” – the term for mainland NFTs – to the company’s Hong Kong market and trade there, Wang said.
“Once our Hong Kong secondary trading platform is set up, users can choose to mint and trade directly in Hong Kong, or they can mint on the mainland platform and trade in Hong Kong,” Wang said.
BSN will play an important role here, said He of Red Date.
Mainland Chinese platforms that create digital collectibles with BSN-DDC, a domestic BSN network, can transfer the NFTs to BSN’s overseas network Spartan or Ethereum and even trade on OpenSea, according to He.
“There is nobody [legal] problem with transferring NFTs out of the mainland, as no personal information is attached to them. But you cannot transfer income from trade back to the mainland. That would be illegal and considered money laundering, he said.
Hype is dying down
The explosion in NFT interest took off in China in 2021, peaking around May and June last year, before slowing significantly and bottoming out in October, according to Wang.
On the mainland, Wang said the company will focus on exploring the tools of digital collectibles.
“Until now, many people have bought NFTs for collection or trading purposes. We hope to explore more opportunities,” Wang said. He added that ShucangCN is working with a virtual reality company to create digital collectibles linked to assets or buildings in their virtual world.
The Hong Kong unit has submitted an application to become part of the incubation program of Cyberport, a technology business park supported by the Hong Kong government.
ShucangCN and NFT China officials said they aim to generate a combined 50 million yuan in revenue for 2023, compared with 2022’s 30 million yuan.
State player?
While doubts remain about the legitimacy of NFT trading in China, state-owned entities China Technology Exchange and Art Exhibition China, together with blockchain developer Huaban Digital Copyright Service Center, on January 1 this year launched a digital collectibles trading platform “China Digital Asset Trading Platform” , according to state media reports.
However, the website said only that the platform is “coming soon” and that it accepts collaborative applications.
“It’s a bold move to publicly market itself as a secondary trading platform,” Red Date’s He said of the new entrant, adding that he had warned platforms built on BSN not to engage in secondary trading.
Despite regulatory uncertainty, Wang said at ShucangCN that there is still business to be had on the mainland.
“Trading platforms in China put prevention of speculation as the first priority,” Wang said, adding that platforms such as iBox have operated for quite a long time and avoided strict government restrictions.
“So far, the risks seem to be controllable,” Wang said.
