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How are NFTs viewed in China and how does the ban on crypto currencies affect NFTs?
China has a thriving non-fungible token (NFT) market. However, the way it operates is unique and separated from other global operations. Holly White of Rouse and Jin Ling of Rouse’s strategic partner Lusheng Law Firm explore the key features of NFTs in China, their usage and how to manage the risks. To register for our webinar on NFTs in China, please click here.
How are NFTs viewed in China?
In China, NFTs are referred to as ‘digital collectibles’ rather than ‘tokens’ to remove any association with crypto currencies, which have been banned since 2021. Given this, all NFTs are denominated in Chinese RMB with payments being made via traditional methods such as credit and debit cards and digital wallets such as WeChat pay and Alipay.
How does the ban on crypto currencies affect NFTs
NFTs can only be sold or gift twice: the original transaction and one subsequent sale or gifting. This is due to concerns about links with cryptocurrencies and excessive prices. In a famous case, a traditional fresco themed NFT with a starting price of 9.9 RMB was sold second-hand for 1.5 million RMB. Whilst the trading restrictions are established by law, it is for platforms to decide their own rules within those boundaries.
Different platforms take different approaches which reflect their levels of risk appetite and regulatory pressure. Out of China’s top ten influential NFT platforms, all have taken a non-secondary tradable approach, possibly allowing gifting in certain circumstances. By comparison most of the small platforms, accounting for 56% of all platforms, allow secondary transactions. Whilst in the future the regulators may change their approach to secondary trading, this is not certain. A ban in March 2022 on some of the smaller trading platforms, highlights regulators may take a firmer position in the future.
Furthermore, China has developed its own blockchain technologies in order to prevent the usage of crypto currencies. This means that NFTs minted in China can only be accessed in China, they cannot be bought or sold globally.
How is blockchain regulated?
China has developed its own blockchains which are referred to as the Alliance Chain or Private Chain. These are forms of blockchain built in China by a consortium of the big tech companies. They are not fully decentralized; Each blockchain is managed by a single company or select group in collaboration with Government entities. There are regulatory requirements for all users to verify their identities and allow the state to intervene where “illegal activities” take place. Having sperate state-backed blockchains creates a ‘closed loop system’ with no international integration.
Given the market restrictions, how are NFTs being used?
NFTs are being used in diverse ways, including sale of art and to digitalize museum artifacts. From a brand perspective, NFTs are predominately being used in two ways. Either as marketing campaign giveaways or licensing brand images to be minted (often via an app developer) and sold on NFT platforms in exchange for royalty fees. Generally, the fees paid for NFTs are low, generally ranging between 50-300 RMB. Prices can be higher but not as high as elsewhere. The first digital collectable from Chinese painting master Qi Baishi sold for the hammer price of 300,000 RMB.
How are western brands using NFTs in China?
An increasing number of Western brands are starting to capitalize on the opportunity. Whilst not a large commercial opportunity, it is a good way to build brand value through the eye-catching nature of NFTs. The NBA released NFTs with five different basketball related designs incorporating Spring Festival imagery. Every day of the festival in 2022, from New Year’s day, fans had the chance to participate in sales three times a day. Each day the number of copies were limited to 2,000.
In September 2021, ZKBox (NFT platform) announced a new collaboration with COACH and GQ China, who released 6 limited edition NFTs based on iconic designs from COACH’s Fall 2021 collection. Fans of COACH could enter the competition to win one of the six NFTs by sharing their “Mix and Match” ideas of personal designs, submitted via Weibo (Chinese Twitter).
What are the risks and how can they be mitigated to successful delivery of NFTs?
Given that NFTs are being used to build brand value, regulatory non-compliance and intellectual property pose the biggest risks.
As this fact sheet highlights, there are regulatory restrictions in which are not present in other markets, specifically relating to crypto currencies. These must be handled carefully in order to ensure compliance and minimize risks from enforcement. Furthermore, market players including NFT platforms, minting companies and distributors must have the right approvals from Government in order to operate. Anyone planning to create and deploy NFTs should ensure all partners can legally deliver on their obligations.
As with other markets, brands will be reliant on working with a number of partners to utilize NFTs in China. Consideration needs to be given about how to prevent any misuse, abuse or loss of IP across all parties and in all scenarios.
Taking a considered approach to the creation and deployment of NFTs will enable the effective risk management and successful outcomes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.