Proposal for NFT Exchange’s Compliance Quest in China

Compared to coin-issuing ICOs, NFTs will have a higher legal tolerance

This article is written for overseas and domestic businessmen engaged in the NFT business, not literacy class science, therefore, Sara will not introduce such basic concepts as what is NFT. Given that the industry does not know much about the legal regulation of art investments and thinks that art can be bought and sold at will after it is on the chain, unfortunately, this understanding is wrong. Recently, when our team assisted an official institution in its assessment, we discovered that NFT trading is actually trapped by the State Development [2011] No. 38 and the State Development [2012] No. 37, and that non-licensed unauthorized equity-based trading is an illegal event.

In response to this problem, there is the following analysis to try to find a solution path, a family of words, for reference only.

Proposal for NFT Exchange's Compliance Quest in China

NFT trading market or exchange

Based on NFT is currently concentrated in the field of intellectual property, cultural and artistic works, the topic is hot, celebrity thugs have made attempts, painters, singers, athletes are creating their own NFT assets. What is certain is that producing NFT assets and holding your own NFT assets is probable to be tolerated by Chinese law. The logic is simple, no harm to the public or unspecified interests, people have the right to dispose of their own assets, but also have the right to use technology to process virtual assets and hold. The problem lies in the “NFT transactions”, occasional transactions between acquaintances, and the law will not be forced to do so. But if there are “centralized bidding”, “market making”, “standardized contracts”, “more than 200 equity holders ” is a violation of the normative documents issued by the General Office of the State Council, the exchange market organizers and participants behavior in China is illegal. According to Sara’s litigation experience in handling other cultural and entertainment exchanges, similar behavior may attract two red lines: first, when the fair value of cultural artworks is not high, but speculated to sky-high prices, or even manipulated by pushers, the criminal law will evaluate its behavior suspected of fraud; second, when the interests of cultural products are divided in equal shares or have options futures and other transactions, then the criminal law will likely evaluate its behavior suspected of illegal business crimes.

Proposal for NFT Exchange's Compliance Quest in China

No. 38 + No. 37

Readers who have studied the history of financial innovation in China will still have an impression of the “heyday” of the various exchanges that became popular ten years ago. At that time, many commodity exchanges (or commodity exchanges), art exchanges, equity exchanges and property exchanges sprouted up all over the world, packaging artworks, postage and coin cards, and all kinds of ordinary commodities to inflate prices and lure financial consumers into the market. During this period, many exchanges also had special “lecturer teams” that gave white customers K lines, bands, and cases to fool them into deep hedging. The risk accumulated to a certain extent, in 2011, the 38th document “State Council on the clean-up and rectification of various trading venues to effectively prevent financial risks decision”, in 2012, the 37th document “General Office of the State Council on the implementation of the clean-up and rectification of various trading venues” has been introduced, specifically clean-up and rectification of equity trading, bulk medium and forward trading and other standardized contract trading of various trading venues. Among them, there are exclusionary provisions for electronic aggregation, anonymous trading, no splitting into equal share issues, and standardized contracts, etc. Violation of one of them should be cleaned up and rectified. Back then, basically only exchanges approved by provincial people’s governments were retained (a very small number), and for new exchanges, the approval of the State Council or the financial management department of the State Council was also required. In reality, obtaining these two approvals is comparable to the Shunde Road, with very few surviving.

Proposal for NFT Exchange's Compliance Quest in China

The path to resolution under Chinese law


Compared to coin-issuing ICOs, NFTs will have a higher level of legal tolerance. The solution we can think of is not to license overseas or move the operation team to Singapore, but two attempts: one is to transfer by agreement, but it is easy to be suspected of “electronic aggregation” and requires careful planning; the second is a more confident and bold approach: licensed operation, where the license is not an exchange license, but a financial license.

From BTC, the cornerstone of the coin world, the financial attributes of crypto assets are engraved in the DNA, from clearing and settlement to Defi, all of them are permeated with the phantom of finance, and NFT is no exception, if there is no hype value, it is not famous.

Since it is a financial-like act, the most appropriate way under Chinese law is to hold a license that can encompass the scope of business. Inspired by No. 37, we find that “auction” is excluded from the law, so we can try to buy the controlling interest of the auction house or cooperation, etc., to conduct related business within the scope of the license, nowadays the auction house is not the smart greasy uncle knocking small hammer in the film and television dramas. Online centralized display, give a time period for bidding, the final result is automatically given by the program, the goods are also then arranged by the program mail sent to all over the world.

Another path, which is also the experience of Sara’s players in the second luxury industry, is that pawnbrokers, as local financial institutions, not only have the function of financing, but also the legal right to sell the absolute pawned goods. Within the scope of operation of this license, if it matches the demands of NFT, it may be possible to collide with a number of micro-innovations. As for new business methods, they can be coordinated and communicated with regulators. Under the current trend of “deregulation”, legitimate micro-innovations by licensed institutions are generally encouraged. Of course, there is a more dangerous move, that is, the agreement to trade. Offline operations are relatively common, but frequent agreement trading online, breaking through the frequency of OTC, essentially forming continuous bidding, electronic aggregation, anonymous trading, etc., will be easily misunderstood by the various regulatory authorities, thus slipping into illegality.

Write in the end
We support innovation and a new value for artwork. But from the existing situation, NFT has a price without a market may be a commercial problem; NFT exchange is regulated will be a legal problem. Self-loathing, rather than actively think about whether the existing legal framework can meet the needs of NFT transactions.

Sara boldly proposed a few solutions to try to persuade friends to operate with a license and compliance, rather than walking a tightrope at every step. Of course, with the development of social life, the regulation of art investment may tend to relax, but the strong regulation of financial behavior will not change, and the protection of minting rights and financial management order will not change. In the trial and error of finding the boundaries of compliance, new technology and old laws also require dialogue and compromise.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/proposal-for-nft-exchanges-compliance-quest-in-china/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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