The state of NFTs and marketing with NFTs in China

Non-fungible tokens – or “NFTs” – have been consistently in the news lately, first for their meteoric rise in popularity and then for their equally steep setbacks, which include falling prices, “rug pull”-fueled lawsuits and probes from regulators such as the US Securities and Exchange Commission. While legislative activity and regulatory scrutiny have followed NFTs every step of the way, including in markets such as the US and China, it is worth noting that the market and regulatory environment for NFTs in China has developed quite differently than in many other regions .

As of 2021, China has completely banned the production and trading of cryptocurrencies. Because NFTs rely on the same blockchain technology and are often associated with cryptocurrencies, many observers expected NFTs to be thrown in with this ban, but that has not been the case. NFTs remain in circulation in China, and there are several prominent platforms for minting and buying (but not trading), always under the label “digital collectibles” rather than “tokens” to emphasize their non-tradable and non-currency status . (Terminology is also shifting to some extent in the US, away from “NFTs” towards “Collectible Avatars”, “digital collectibles”, “virtual assets”, etc.)

Although the long-term legal status of NFTs in China remains somewhat ambiguous, this has not stopped companies from successfully using NFTs in marketing campaigns, seemingly without legal problems.

Legal environment

China’s regulatory regime for virtual assets is still evolving. On the one hand, virtual assets are clearly protected as civil property under the Civil Code, which serves as the legal basis for a Chinese citizen to own digital assets, including digital coins and tokens. On the other hand, virtual coins/cryptocurrency initial offers, trading and speculation are strictly prohibited as of September 15, 2021 Circular on further prevention and management of the risk of speculation in virtual currency transactions, issued by the People’s Bank of China, along with nine other government departments. This notice prohibits the use or circulation of virtual currencies in the market as currency, along with virtually all virtual currency transactions. It also states that it is illegal for foreign cryptocurrency exchanges to offer these services to Chinese residents.

However, this notice and other related laws do not address NFTs directly, and do not explicitly include NFTs within the ambit of prohibited “virtual currency.” Moreover, general blockchain technology (without currency functions) is allowed and even encouraged in China, along with other general use security and cryptography technologies, for example under the Administrative Regulations on Blockchain Information Services issued by the CAC on September 10, 2019. These Regulations define encouraged “blockchain information services” very broadly as “information services provided to the public based on blockchain technology or systems.”

In this context, several of China’s most prominent NFT issuance/incubation platforms, such as Jingtan and The One Art, have successfully applied to be recognized as qualified “blockchain-based information service providers” under these provisions. This is not definitive, but it does indicate some acceptance by the Chinese authorities of non-currency NFT activities as legitimate.

Prevention of NFT-related risks (especially trading and speculation) is nevertheless a key concern for China’s regulators and related stakeholders. For example, on April 13, 2022, several industry associations, including the National Internet Finance Association, the Securities Association and the China Banking Association, jointly issued Proposal on the prevention of NFT-related financial risks, which prominently includes a commitment by members of these three associations to refrain from financing or securitizing NFTs, and to refrain from providing trading or related financial services for NFTs in any form. This is softer than a similar ban would be if it were enshrined in formal legislation, but still flags the government’s stance on this issue (NFTs are not to be traded or used as any kind of financial instrument), and the industry in China has largely aligned its practice with this norm.

At the same time, NFTs are also promoted in other contexts, including as an IP protection tool. For example, Shanghai’s 14th Five-Year Digital Economy Development Plan (June 2022) includes support for companies researching the use of NFTs and related digital assets to improve the global circulation of digital intellectual property and digital authentication of ownership.

NFT Business in China

Given the above regulatory regime, NFTs in China are created and managed differently than in the rest of the world. In almost all cases, they are labeled as “digital collectibles” rather than “tokens” to emphasize their non-tradable and non-currency status. Additionally, such NFTs are not operated on a public blockchain, but rather on the private blockchain of the respective issuing platform. Finally, these platforms explicitly prohibit the trading or resale of the NFTs they issue, subject to a few narrow exceptions.

These limitations have presented challenges for some NFT platforms in China. Recently, Tencent’s NFT platform Huanhe announced that it will no longer release any new digital collectibles and will continue to function only as a legacy storage platform for existing users’ NFTs. It also said that existing users could continue to hold and display their current NFTs or request a refund from Huanhe.

Other platforms continue to operate and try to meet users’ demands for liquidity despite the general trading ban. For example, the Jingtan app operated by Alibaba now allows users to “trade” items in their collection by “gifting” digital collectibles after 180 days of ownership, with a two-year lock-in (no sales contract) applicable to the recipient of the gift. This creates obvious opportunities for back-channel payments for such “re-gifting”, so Jingtian says that if it detects proof of payment for such exchanges, it will suspend or close the user’s account, presumably also resulting in the loss of any NFTs that held in such an account (since such NFTs will be held on Jingtian’s own blockchain, and not held directly by the user).

Marketing with NFTs

Although the long-term legal status of NFTs in China remains somewhat ambiguous, this has not stopped companies from successfully using NFTs in marketing campaigns, seemingly without legal problems. Recently, Tmall hosted an online event called the Metaverse Environmental Protection Auto Show, which promoted the launch of eight electric vehicle brands, with users able to obtain NFTs for these brands by lottery as part of the promotion. McDonald’s also ran an NFT campaign, allowing customers to use points from the purchase of Maimaikazi Crispy Chicken Thigh Burger (麦麦咔滋脆鸡腿堡) to redeem a related NFT through the McDonald’s app, WeChat and Alipay.

Given this context, brands may still be able to use NFTs successfully in their campaigns in China, but should proceed with caution.

Global approaches to NFTs will not work, and may be illegal, even while the unique Chinese NFT ecosystem provides new opportunities for creative marketing. Key safeguards for brands considering NFT campaigns in China should include: (i) use legally registered Chinese NFT platforms; (ii) describe NFTs in China as “digital collectibles”, not as “tokens” and never as “currency;” and (iii) does not permit or encourage trading or speculation in NFTs, or imply that NFTs may increase in value or may be used as currency.

Justina Zhang is a senior partner at TransAsia Lawyers. She has extensive experience in the technology, media and telecom industries, as well as intellectual property protection and advertising.