What legal issues should be paid attention to when the NFT market is hot?

How to develop NFT in compliance with regulations is the primary consideration for practitioners.

Recently, Tencent and Dunhuang Research Institute announced that they will release the first public welfare NFT. Prior to this, AntChain also launched a new payment code skin NFT collection. The increasing popularity of the NFT market has led many practitioners in traditional industries to explore the integration of NFT. As a new thing derived from blockchain technology, NFT will also be included in supervision in China. How to develop NFT in compliance with regulations is the primary consideration for practitioners.

Many legal practitioners told Lianxin that the domestic policy and legal environment determine that China’s NFT industry will not become a financial product like overseas. But through NFT to empower the physical industry, it may be supported and encouraged by policies.

Who will supervise NFT?

It was reported on September 6 that the Dunhuang Research Institute will jointly release the first non-profit NFT in the cultural and expo industry, limited to 9,999 copies when participating in Tencent’s “99 Charity Day” activities.

Prior to this, Tencent also launched the NFT trading platform “Magic Core” and issued and sold a number of NFT products.

AntChain first released NFT products in June. In order to avoid secondary market hype, AntChain requires users to hold NFT digital works for at least 180 days before they can transfer NFTs to Alipay when the rules or mini program functions allow them in the event. Real-name authentication friends.

With the entry of domestic Internet giants one after another, many practitioners in the blockchain industry also want to participate. So, are there any regulatory issues with NFTs, and what policies and laws do practitioners need to understand?

Xiao Sa, a partner at Dacheng Law Firm, said that NFTs do exist in China.

Xiao Sa introduced that as a new business, the issuance and sale of digital collections should be reported to the national and provincial cyberspace administration offices for safety assessment in accordance with relevant regulations. On the other hand, most of the carriers that NFT circulates in China can be classified into the category of online publications. Therefore, the casting and sales of NFTs should also follow the regulatory provisions of existing online publications.

Xiao Sa said that NFTs are not products that require government pricing, and operators have the right to price sales based on production and operation costs and market supply and demand. Compared with the astronomical price of millions of dollars abroad, domestic NFT prices need to be both legal and reasonable. Given that China’s current NFT sales model does not allow secondary transactions, this “bubble” will not lead to stakeholder financial risks. It is unlikely that supervision will intervene in this regard, but this does not mean that operators can speculate at will.

Wang Dongmei, founder of Beijing Liantong Law Firm, believes that NFT has two-sided properties. On the one hand, it can be used as a proof of equity on the chain; on the other hand, it is convenient to circulate between blockchain accounts. In this regard, there are certain gaps in supervision.

Wang Dongmei said that whether NFT will face supervision in China mainly depends on its application scenarios. If it is only a proof of actual ownership on the chain, NFT reflects the aspect of empowering the real economy, the progress of technological application, and it is encouraged. If it is just hype in the name of appreciation, the government may refer to the regulatory policies on virtual currencies to crack down.

In fact, the nature of NFT is also controversial in other countries.

On May 12, 2021, a user of the NBA’s digital collectibles platform NBA Top Shot sued the platform’s developer Dapper Labs and its CEO, alleging that the NFT sold by it should be unregistered securities in nature and should be submitted to the SEC (US Securities and Exchange Commission) registered, the case is currently under trial.

Attorney Ding Feipeng believes that if NFTs are recognized as securities in the United States, it may also have an impact on China’s regulatory policies.

Ding Feipeng believes that from a financial perspective, as a form of expression of digital assets, NFT’s properties such as casting and circulation should be within the scope of the law. However, once there is a circulation premium resale, or as a speculation target is indirectly applied to high-risk areas such as money laundering and contracts, it will be used by some people to obtain high profits and may touch the legal red line.

Xiao Sa said that, compared with ordinary virtual currencies, NFT is inseparable and has the inherent nature of reality mapping, which makes it possible to be defined as proof of equity and embark on the path of compliance.

Supervision needs to be improved

Regarding the current status of domestic NFT supervision, Xiao Sa believes that NFT currently lacks “tailor-made” laws and regulations.

Xiao Sa said, first, there is no clear technical standard for NFT. In order to save space, most of the so-called “on the chain” is actually the hash value of the work on the chain. The work itself is not on the chain but exists in the cloud. Therefore, it is necessary to clarify the chain standard to avoid misunderstanding; second, the nature of the rights of NFT owners is not clear. The rights that citizens have after purchasing NFTs are significantly different at home and abroad. Whether it is property rights, creditor’s rights or intellectual property in a certain sense is currently inconclusive, it is necessary to pass laws to confirm.

Xiao Sa said that, unlike foreign countries, from the perspective of China’s current NFT casting and sales, NFTs do not have the property of securities. There are two reasons: one is that there is no secondary market for NFT; the other is that NFT’s casting platform does not allow secondary transactions.

However, under the current model, NFT may actually have risks: first, users will be allowed to transfer the gift for a period of time, so there is the possibility of secondary transactions; second, it is not ruled out that some platforms open the secondary trading market without authorization.

Regarding regulatory policies, industry professionals also expressed their views from their own perspectives.

A technical person in charge of a domestic NFT platform stated that NFT has two core values, one is proof, and the other is warrant. The former is used to protect rights and the latter is used to exercise rights. An important condition for the exercise of rights and interests is that they can be circulated and transferred. If this condition is not met, the practicality of NFT and the right to exercise rights and interests will be compromised. Rights and interests are only valuable if they are placed in the market. Just as if a painting cannot be auctioned a second time, few people will collect it. The value of the artwork will be difficult to reflect, and the survival of the artist may become a problem. In the same way, around the digital economy and innovation and innovation, NFT could have been an innovation that can activate the art market, but if there is no secondary market, NFT will lose its role and value.

NFT should focus on empowering the real economy

Wang Dongmei believes that most domestic NFTs are digital assets created based on blockchain. As the market develops, there will be more mappings of physical assets off the chain. This is a new thing, and regulators are also carefully observing and studying relevant policies. Chinese law grants citizens the right to own virtual property, which is stipulated as real right. With reference to the Chinese court’s characterization of Bitcoin as a specific virtual commodity in 2013 , NFT may be defined as a legal virtual property in the future, which is what practitioners want to see.

Domestic practitioners have considered the regulatory policies. Therefore, Ali and Tencent’s NFT attempts are only at the level of collection and property ownership. The prohibition of resale and premium circulation are all attempts within the scope of supervision.

Wu Fengheng, the founder and executive director of Coolian Technology, said in an interview that NFT is a technical means to confirm the rights of digital goods and digital rights in the digital world. Labor, and commodities can be exchanged.”

Wu Fengheng believes that the rights and interests in the digital world include not only the original digital paintings, music, videos and other items or valuable assets, but also the rights and interests mapping of items or assets in the real world in the digital world. At present, NFT has formed two markets: one is a market dominated by the US dollar, which has certain speculative properties, but the overall market size is still limited; the other is a market dominated by the renminbi, and domestic companies have just begun to explore.

Wu Fengheng believes that most markets will go through a stage from a bubble to a return to true value. He predicts that in the next one or two years, the number of global NFT products, transaction volume, and the number of platforms will explode, more valuable NFT works will be traded in the US dollar market, and more NFTs that empower the real economy will be in the RMB. The market is traded, and as the market develops, countries will successively introduce relevant policies, which are expected to focus on the areas of KYC/AML (eligibility review for account holders/anti-money laundering) and taxation.

Wu Fengheng suggested that in formulating relevant policies, the US dollar market and the RMB market can be distinguished first. For the U.S. dollar market, some market pilot windows can be reserved, but it is necessary to prevent speculation risks and strengthen KYC/AML measures; for the RMB market, since it is circulating within the RMB system, more encouraging attitudes can be adopted to encourage the empowerment of the real economy. To strengthen China’s blockchain industry.

 

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