While NFT traders in the US fret over their tax responsibilities for selling big-ticket digital assets, their peers in China are faced with a very different problem: the Chinese industry is headed to a future where NFTs can’t be traded at all.
On April 13, three national financial industry associations in China—which collectively cover almost all Chinese banks, brokerages, and fintech companies—released a joint statement on how to approach NFTs, one-of-a-kind digital tokens that preserve ownership and copyright information on a blockchain. To “prevent financial risks,” they are asking members not to offer centralized trading platforms for NFTs, to refrain from investing directly or indirectly in NFTs, and to forbid using cryptocurrencies like Bitcoin or Ethereum in buying or selling them, among other measures.
The initiative is designed to make it harder to trade NFTs and impossible to speculate in them. Ultimately, the shifting political atmosphere around NFTs may help test whether they hold any intrinsic value.
In the US, most NFTs are minted on the Ethereum blockchain and traded in Ethereum; they are among the most hyped cryptocurrency products in recent years. But in China, where cryptocurrency trading and mining are banned, NFTs have managed to find a breathing space by staying away from crypto. Instead, major tech companies like Alibaba and Tencent have their own NFT marketplaces. Popular brands like Audi and McDonald’s, which released NFT offerings to Chinese consumers to jump on the bandwagon, did not host them on public blockchains.
However, there’s always been a sense of uncertainty in the industry: as with all young tech creations that don’t fit into traditional regulatory frameworks, the countdown started early for when the Chinese government would step in. Since 2017, China has maintained a hard stance against crypto unparalleled around the world. The Chinese financial and cyber regulators have not yet outright banned the trading of NFTs, but the silence is casting a long shadow over the business.
This new joint statement is not an official statement from the government, but it’s close. “While the pledge letter doesn’t have any legal effect, it is somewhat binding to the members of these three associations,” says Jay Si, a Shanghai-based lawyer at the Chinese law firm Zhong Lun.
While the state is silently considering its move, NFT industry players are trying to stay on the safe side.
For example, NFT platforms owned by the prominent Chinese tech companies don’t use the term “NFT” anywhere. Instead, they call them “digital collectibles.” The idea is that they are not much different from your Funko Pop toys or vinyl collections, except they are online, on private-company-owned blockchains that are not fully transparent to the public. Collectors have to buy them with government-issued currency, and resale is not allowed.
Alibaba, for example, released its NFT app Jingtan in December and is now releasing NFTs as often as every day. These limited-edition offerings—usually 10,000 copies of renowned Chinese artworks or works by digital-native artists—are sold at prices no higher than $5. Buyers may have to click in milliseconds to secure the purchase, but it doesn’t cost much. And once they own it, they need to wait six months before “gifting” the item to another user, who needs to wait another two years before gifting it again. Last year, Alibaba banned its own secondhand marketplace from listing any NFT products. Because of these rules, the NFTs have no official resale value, so they won’t work as a financial investment.
But where there are rules, there are always workarounds. In group chats on social media apps, people discuss their NFT collections and effectively form an NFT black market. Unsurprisingly, scams and frauds are rampant. On the Quora-like platform Zhihu, a user documented how he lost about $640 to scammers who promised to sell him a set of NFTs on Jingtan but never did.
In February, Jingtan announced that it had punished 56 NFT buyers who violated the rules by “gifting” NFTs to other people in exchange for revenues on other platforms. The platform is “vehemently against any form of resale of digital collectibles,” it said. It also teamed up with other tech companies to release an “industry self-discipline pact,” which addressed all the risks associated with NFTs without mentioning the word once.
To fans of the original NFT model, the Chinese-style “digital collectibles” represent a disappointing divergence. “If you purchase a physical artwork, even though you know you probably won’t sell it and no one is offering to buy it for now, it still has its value. Because there’s an opportunity [that someone will buy it in the future],” says Jin Yinghuan, Guangzhou-based creator of the NFT project Supernova. (Jin Yinghuan is his online alias. He refused to provide his real name for this story.)
“Once it’s decided that there’s no secondary market and there’s not even the channel to give them away, [the NFTs] basically will lose all their value,” Jin says.
His own NFT artworks, a collection of 10,000 avatars released in March, are sold on the American platform OpenSea, which isn’t available in China. He also released them on Bigverse, a Chinese indie NFT marketplace formerly named NFTCN. Until now, these smaller marketplaces have been more adventurous about allowing users to trade and profit from their collections. Bigverse claims to be “the largest and most active digital art marketplace” in China. It uses Ethereum to mint the NFTs and allows NFT trading.
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But Bigverse and others are also at a higher risk now that the industry seems to have chosen a future that doesn’t involve NFT trading. Bigverse’s founder, Shi Qi, declined an interview request and said the company is currently in active conversation with regulators.
By steering away from the political risks, Chinese NFT players have chosen a very different journey from their peers in the West. The industry has embarked on a tech experiment that tests the concept of NFTs: Can the technology’s value in preserving intellectual property be separated from its value in creating financial investments? Will people still be interested in NFTs when there isn’t a big profit to be made?
“The Chinese NFT market will continue to decouple from the overseas ecosystem that’s built on cryptocurrencies,” says Si. “China will be exploring a pricing and trading model that suits its own needs.”