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Chinese internet court recognizes NFTs as legal property

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(Kitco News) - A recent ruling by the Hangzhou Internet Court establishes the important precedent that nonfungible tokens (NFT) constitute online virtual property and should be recognized as such under Chinese law.

The court found that NFTs “have the object characteristics of property rights such as value, scarcity, controllability, and tradability” and “belong to network virtual property” meaning that they “should be protected by the laws of our country.”

Because of the particulars of the case, the court was forced to “confirm the legal attributes of the NFT digital collection” in order to rule on the dispute. Their definition of NFTs sets an important and far-reaching precedent for digital property in China, and further distinguishes NFTs from cryptocurrencies in the world’s second-largest economy.

The defendant in the case was a digital technology company in Hangzhou (Company A) which operates an e-commerce platform that sells digital artwork. The plaintiff was a user of their platform.

In February 2022, Company A sent out a rush purchase announcement for an “NFT digital collection blind box,” and attached a QR code for the purchase. The plaintiff claimed that he successfully snapped up one of the limited quantity of collections, and paid 999 yuan. However, Company A did not deliver the blind box, and instead issued him a refund 10 days later. The plaintiff then sued Company A, claiming their actions violated his legitimate rights and interests, and demanded that Company A complete the transaction and deliver the blind box, or compensate him 99,999 yuan if it could not.

Company A claimed that the order, which wasn’t completed at the time because some of the plaintiff’s information did not match what they had on file, had not been concluded, and even if it had been, it had been terminated according to their terms, and the plaintiff was refunded and did not lose money.

The court determined that the transaction objects involved in the case were NFT digital collections rather than NFT equity certificates, so it was necessary to confirm the legal attributes of the NFT digital collection before it could issue a ruling.

“NFT digital collections have the object characteristics of property rights such as value, scarcity, controllability, and tradability,” they wrote. “At the same time, they also have the unique attributes of network virtual property such as network virtuality and technology, and belong to network virtual property. The contract involved in the case does not violate the laws and regulations of our country, nor does it violate the actual policy and regulatory guidance of our country to prevent economic and financial risks, and should be protected by the laws of our country.”

Regarding the transaction itself, the court accepted that the snap-up announcement issued by Company A “can be regarded as an offer made by Company A to a specific counterparty” once the plaintiff successfully submitted the purchase information and payment. “The above-mentioned content constitutes part of the contract agreement between the two parties, and there is no invalid situation, and it is binding on both parties,” they concluded.

However, because one digit of the plaintiff’s phone number and one digit of his ID number did not match the information on file, his order did in fact violate the terms of the offer, so Company A was within their rights to cancel the order and refund the purchase price.

While the court rejected the plaintiff’s claim, its ruling on the nature of NFTs removes digital properties from the gray area they’ve existed in since China moved to make cryptocurrencies illegal in Sept. 2021, and places them firmly within the framework of legally recognized property.

“As a virtual artwork, NFT digital collection itself condenses the creator's original expression of art and has the value of related intellectual property rights,” they wrote. “At the same time, NFT digital collections are unique digital assets formed on the blockchain based on the trust and consensus mechanism between blockchain nodes. Therefore, NFT digital collections belong to the category of virtual property. NFT digital collections, a new type of online virtual property, should be protected by the laws of our country as the object of transactions between the two parties.”

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