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China Reiterates Intention to Regulate NFTs

It is almost one year now since China initiated a ban on cryptocurrency mining, crypto transactions, and other businesses related to cryptocurrencies. In the beginning, the majority of participants thought that the ban would go the way of the previous pronouncements which didn’t find a follow-through in implementation. Things turned out different this time as the ban was fully implemented, leading to one of the biggest events in the crypto industry in 2021.

The aftermath of the implementation of the ban has set the tone for the regulation of developments surrounding cryptocurrencies. This has made practitioners tread with caution on anything that has to do with emerging technologies like Non-Fungible Tokens (NFTs) and the Metaverse.

NFTs gained popularity in 2021 by providing an avenue for extracting value from digital arts. Beeple’s Everydays: The First 5000 Days set the record for the highest-priced NFT by selling for $69 million. Of interest is the fact that the transaction was carried out using cryptocurrencies which had become a compatible and convenient medium of transaction in the NFT industry.

Across the globe, many NFT projects have followed this pattern, exploiting the compatibility of NFTs with cryptocurrency to make for easier transactions. This is a system that does not sit well with NFT projects and users in the Chinese region. Involving cryptocurrencies in such transactions would imply going against the laws of the land. In effect, it would attract the well-defined sanctions that have been put in place by the government for those violating the law against cryptocurrencies.

Nevertheless, NFTs, being products of blockchain technology, have not been banned in China. The development of NFTs or similar projects is allowed in China while the government claims to be working on a compatible regulatory framework that will allow the industry to thrive.

On a couple of occasions, the Chinese government has clarified why the industry needs to be regulated. One of the main reasons is to discourage speculation among users, which could create a marketplace that can be exploited for illicit transactions and money laundering. One of the conditions already provided for practitioners is to avoid the ‘NFT’ nomenclature and rather describe assets as ‘digital collectibles’.

In another twist, the official newspaper of China’s Communist Party has thrown up a new argument against the kind of treatment that digital collectibles have received so far. An article noted that treating them as just cultural and creative collections is not enough. It also argued that the supervision of the industry should go beyond its present condition where only the market supervision departments and intellectual property departments are responsible for overseeing them.

The party wants more strict supervision for digital collectibles, considering that it is a product of financial technology. The aim is to find better protection for consumers who could be exposed to high risk, considering the weak price structure that currently exists in the industry.

Tech giants and several other companies in China are already involved with digital collectibles. They are creating platforms where individuals, creators, museums, artists, and known brands can explore to release digital collectibles. Some of them, like WeChat, have already started to comply with the ban that prevents speculation and secondary transactions. However, others are yet to comply and run such services under the radar.

A proper regulatory framework has therefore been advised, which will require measurable compliance with regulatory agencies. The framework would require digital collectible platforms to report operating mechanisms and consumer rights protection. It would also involve regular trials, to ensure that illegal speculation and secondary transactions do not occur on the platforms.

 

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