On April 13, 2022, the National Internet Finance Association of China, the China Banking Association and the Securities Association of China jointly issued the Initiative[1] to Prevent relevant Financial Risks of Non-fungible Tokens (the "Initiative"). This is the first Non-Fungible Token (NFT) -themed official document involving NFT compliance since the rapid development of NFT in China over the past years. Although the Initiative is only a self-discipline statement and not mandatory regulatory rules, considering the special status of the three associations as official industry self-discipline organizations, it represents the regulatory attitude and trend of supervision to a great extent. We discuss the details of the Initiative in more depth below.

Affirms the positive role of NFT and points out the related risks

•      The Initiative mentions that "China's NFT market is getting increasingly hot in recent years", and translates "NFT" into "非同质化通证" instead of "非同质化代币". Such Chinese translation not only gives an official Chinese translation of NFT for the first time, but also affirms the application of an NFT concept in China and explicitly distinguishes it from cryptocurrencies (tokens, "代币") which are strictly prohibited in China.

•      It also defines NFT as an innovative application of block chain technology and confirms that NFT has certain value in contributing to China's digital economy and promoting the development of cultural and creative industries. Moreover, it points out that NFT may be accompanied with the potential risks of speculation, money laundering and other illegal financial activities as well.

Encourages innovation and uses NFT to motivate the real economy

•      It advises to reasonably select application scenarios and standardize the application of block chain technology to give full capacity for the positive role of NFT in promoting a digital economy.

•      It proposes that the value of NFT products should have sufficient pricing basis, and the false high price deviating from the basic law of value should be especially prevented.

•      It suggests that the intellectual property rights of NFT's underlying assets should be protected.

•      It requires truthful, accurate and complete disclosure of NFT product information so as to protect the consumer's right to know, right of choice and right of fair trade.

Sticks to the "bottom line" and prevents financial risks

The Initiative resolutely stops any financialization and securitization tendency of NFTs, strictly prevents the risks of illegal financial activities, and proposes six specific codes of conduct as below to be abide by consciously.

•      It stresses that securities, insurance, loans, precious metals and other financial assets should not be included in the underlying assets of NFT to issue relevant financial products, and that is, NFTs must not be used in the issuance and trade of any financial products.

•      It prohibits any initial coin offerings (ICOs) business in distinguished form, more specifically, it does not allow anyone to weaken non-fungible characteristics of NFTs through methods like dividing ownership or creating batches.

•      It does not allow to set up any trading venues in violation of regulations to provide centralized trading (centralized bidding, electronic matching, anonymous trading, market maker, etc.), continuous listing trading, standardized contract trading and others services for NFT trade. From the expression of this point alone, it cannot be said that NFT platforms are completely prohibited. If NFT platforms follows the prior mentioned restrictions and do not use NFTs for any purpose of issuing and trading any financial products, they still have the opportunity to conduct normal NFT business, i.e. providing service related with the purchase of NFTs of the underlying digital artworks. In practice, to avoid the trend of financial speculation, most of the reputable NFT platforms in China do not allow NFT secondary transactions, transfers, or otherwise allow the purchaser of the NFT to transfer it to others as a gift.

•      It strictly prohibits the use of cryptocurrencies such as Bitcoins, ETH and USDT in pricing or settling NFTs. This is consistent with China's current strict prohibitions on cryptocurrencies that cryptocurrencies do not have the same legal status as legal currencies and cannot be circulated in the market as currencies or pricing tools.

•      It urges to process real name authentication for NFT issuers, buyers and sellers and keep customer identity information and issuance transaction records properly, while actively cooperating with anti-money laundering work. NFT platform operators should pay special attention to this point.

•      It dost not allow to invest in NFT directly or indirectly and provide any financing support for such investment. This should be understood as restricting investors from investing in NFTs as financial products for the purpose of financial investment profit, rather than forbidding general users to purchase NFTs for practical purposes such as private artwork collection. In practice, most of the reputable NFT platforms in China are being operated in the name of digital collection platforms and only allow individual users to register.

Gives tips to NFT consumers

•      It also reminds consumers of reporting relevant illegal activities actively and on time.

•      It warns consumers to establish a correct consumption concept and enhance self-protection, and consciously resist and stay away from illegal financial activities.

In addition, it is also worth mentioning that on the day after the launch of the Initiative, to respond to the suggestions of the Initiative, the China Mobile Communication Metaverse Consensus Circle ("CMCA-MCC") and the China Communications Industry Association Block Chain Specialized Committee ("CCIAPC") jointly issued the Self Discipline Requirements on Regulating the Healthy Development of Digital Collection Industry[2] ("Self Discipline Requirements"). Both the CMCA-MCC and CCIAPC are the social organizations under the guidance of the Ministry of Industry and Information Technology of the PRC and registered with the Ministry of Civil Affairs of the PRC. As digital collections are based on NFTs and the development is still at an early stage with unclear value standards, the Self Discipline Requirements mainly reiterates relevant requirements in the Initiative and proposes reasonable expectations.

[Footnote]

[1] Please see: https://www.china-cba.net/Index/show/catid/14/id/40730.html

[2] Please see: http://dgh.tcc2017.org.cn/article/item-501.html