Su Yu of Public Security University: NFTs need “agile governance”

Jay Chou went on a hot search on April 1, and there were media reports that his digital collection BAYC #3738NFT, which was worth more than 3 million yuan, was stolen. This incident has brought the security and regulatory issues of NFT virtual assets to the public’s attention again.

The governance suggestion given by Su Yu, a special expert of “Internet Law Review” and an associate professor of the Law School of the People’s Public Security University of China, is to separate the “technical layer” and “application layer” of NFT from the law, and for the potential wide application of NFT, It is recommended to implement “agile governance” that is divided into scenarios, types, and dynamic adjustments. He pointed out that the development of NFT must fully learn from the previous lessons of the development of domestic virtual currency, and from the very beginning, it has pursued “cutting its roots” with illegal and criminal activities such as money laundering, gambling, and fraud.

Su Yu of Public Security University: NFTs need "agile governance"

Screenshot of Jay Chou’s social account

In recent years, Non-Fungible Token (NFT for short) has gradually attracted close attention at home and abroad. The NFT market has ushered in a “year of explosion”, and the activity of the “Metaverse” has made it “flowery” , cooking oil on fire”. At the same time, the risks of NFTs have also attracted more and more attention from all walks of life.

A well-known artist recently claimed that a valuable NFT was stolen, reflecting that the security of NFT still has certain defects; Internet platforms such as WeChat and Alipay have stepped up efforts to rectify the digital collection platform, reflecting the secondary transaction of digital collections. The secondary market has not yet obtained a sufficient legal basis, partly because the complex risks of NFTs are still difficult to fully predict and control.

Although they are both “tokens” and also gain the most important momentum in Ethereum, non-fungible tokens and homogeneous tokens have completely different “templates”.

The default prototype of homogeneous tokens is “currency”, which has since been extended to financial products such as securities and futures. Therefore, many homogeneous tokens naturally have strong financial attributes; the default prototype of non-homogeneous tokens is “material”. “, marking specific items or rare items (mostly digital artworks or virtual digital images at present), which often have certain use value.

The dimension of “marking” gives NFTs broader application scenarios and richer utilization potential, but it also means that the risks of NFTs may be more subtle and complex, and the realization of precise governance is also more challenging.

Su Yu of Public Security University: NFTs need "agile governance"

Deep understanding of NFT:

It is not a digital token, nor is it directly equivalent to a digital collection

Governing NFT requires a deep understanding of NFT first. NFTs are far from being equal to general digital tokens, let alone “digital collections”.

NFT can not only be applied to the digital culture and art market, but also can be widely used to produce almost any traceable electronic certificate with a unique mark and a limited number of traceable electronic certificates. It has application potential in many fields such as logistics services, education management, e-government, and smart justice. In theory, it can also carry a sophisticated data development and utilization income distribution mechanism to help the development of the data element market.

Because of this, NFTs must be qualitatively “de-financialized” and embrace a wider world within the scope permitted by current legal norms and regulatory policies.

In September 2021, the People’s Bank of China and other 10 ministries and commissions “Notice on Further Preventing and Disposing of Hype Risks in Virtual Currency Transactions” (hereinafter referred to as the “Notice”) clearly prohibits “Bitcoin, Ethereum, Tether and other virtual currencies”. “Strictly prohibit all relevant illegal financial activities, including virtual currency derivatives trading, and resolutely ban them in accordance with the law . ” The regulatory scope of the “Notice” is not only for “virtual currency”, but also includes concepts such as “virtual assets”, “cryptocurrency” and “encrypted assets” .

If it is not completely separated from virtual currency and other public chain encrypted assets qualitatively, NFT may not escape the mistakes of digital tokens.

If it is directly limited to “asset” or “property”, I am afraid that it will not only artificially block the application of NFT, but also will not be conducive to effectively cutting NFT from various digital tokens that are designed to target virtual currencies. This cutting does not mean that NFT is only left in the field of “digital collections”, and richer possibilities need to be actively explored and realized by the industry under the guidance of regulatory policies.

Su Yu of Public Security University: NFTs need "agile governance"

“Agile Governance” for the Future of NFTs:

Sub-scene, sub-type, dynamic adjustment

In the future digital economy and digital society, the underlying technology of NFT is more important and critical than existing applications.

The combination of tagging function and smart contract can complete complex operations with the help of blockchain, creating a rich and flexible rights structure and control system.

Therefore, a direction worth exploring is to legally separate the “technical layer” and “application layer” of NFT: on the one hand, NFT technology will likely become one of the development centers of blockchain technology in the future, requiring us to “” Accelerate the breakthrough of core technologies and provide safe and controllable technical support for the development of blockchain applications.” On the other hand, for the potential wide application of NFTs , it is recommended to implement “agile governance” that is divided into scenarios, types, and dynamic adjustments.

According to the risk assessment results of NFT in different blockchain types and different application scenarios, business pilots will be carried out and promoted in a safe and orderly manner.

It can be the first to explore within the scope of several alliance chains with relatively complete risk control mechanisms, especially if combined with the technical characteristics of NFT and the needs of new smart city construction, the introduction of transferable electronic certificates, bills, qualifications, quotas, etc. directly related to society and people’s livelihood. Products and services are more conducive to opening up the situation for NFTs.

Relevant explorations can be carried out in the “regulatory sandbox”, and regulatory rules, governance measures and pilot businesses can be developed simultaneously.

Under the premise that risks are controllable, one type of business is matured, one type of business is released, and one type of scenario is mature, and one type of scenario is supported. Supervisors adjust regulatory policies in a timely manner according to the results of risk assessment. This path of careful exploration and gradual development is almost impossible. It is the only legal development path that NFT is currently expected to achieve.

The development of the NFT business and market must fully learn from the previous lessons of the domestic digital token field, and from the very beginning, it has pursued “rooting” with illegal and criminal activities such as money laundering, gambling, and fraud.

Only on the basis of the basic formation of “agile governance” and the overall maturity of the risk control mechanism, will the further development of NFT categories, businesses and markets see the light of day.

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