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China prosecutors to crack down on NFTs used as crypto proxies

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(Kitco News) - China's national agency responsible for legal prosecution published a new set of non-fungible token (NFT) guidelines on May 15, warning that NFTs are being used as a proxy for illegal securities and speculative digital assets.

The guidelines from the Supreme People's Procuratorate of the People's Republic of China recommend stronger "risk research and judgment" to differentiate between “true innovation” NFTs and quasi-crypto “pseudo-innovation,” and emphasize the need to "accurately punish crimes" when they are uncovered.

"While [NFT] has high popularity, it is very likely to cause financial risks, management risks, network security risks, etc., and especially legal risks,” they wrote. “Prosecutors are paying close attention.”

NFTs have existed in a legal gray area since China moved to make cryptocurrencies illegal in Sept. 2021. As a result, the domestic NFT market in China is largely self-regulated by the industry.

The prosecutors acknowledged that “as a new application of blockchain technology, NFT has certain development potential." However, they also saw a tendency toward “securitization” of NFTs where ownership of one token or collection was shared among multiple individuals, which they claim violated proper NFT criteria such as non-reproducibility, indivisibility and uniqueness.

"From the perspective of property rights, consumers do not enjoy the ownership of the NFT digital assets they purchase in the sense of civil law, and consumers cannot prohibit others from accessing, copying or disseminating the digital assets mapped by NFT," the report said. "What consumers enjoy is only an exclusive right to prohibit others from tampering with the ownership of the NFT recorded on the blockchain."

This position on NFT ownership appears to contradict the landmark Dec. 5 ruling by the Hangzhou Internet Court, which established that nonfungible tokens (NFT) constitute online virtual property and are recognized 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.” Their definition of NFTs set an important and far-reaching precedent for digital property in China, and further distinguished NFTs from cryptocurrencies and other banned digital assets.

But on March 14, authorities in China released a report showing a 30,000% rise in complaints about NFT scams and price manipulation between 2021 and 2022.

According to the State Administration for Market Regulation report, there were 59,700 NFT-related complaints logged in 2022, up from 198 in 2021. Most of the complaints involved failure to receive items after purchase, refund issues, price manipulation, and high transaction fees.

The lack of clear regulation is hurting China’s NFT industry, as evidenced by the fact that Huanhe, the regulated NFT marketplace of Tencent Holdings, will be shutting down in June and has already begun the process of refunding its users. Other NFT platforms are in the process of moving their businesses to Hong Kong, which has taken a more open approach towards digital assets.

On Jan. 1, China launched the first legally-compliant secondary trading platform for digital assets across the country. The China Digital Asset Trading Platform (CDATP) was jointly built by state-owned China Technology Exchange and China Cultural Relics Exchange Center in partnership with Huaban Digital Copyright Service Center, a private company.

Yu Jianing, co-chairman of the Special Blockchain Committee of the China Communications Industry Association, said that the launch of the CDATP shows that the pace of growth for asset digitization is increasing, but he also acknowledged that digital assets in China face several problems such as technical limitations, collection valuation and copyright disputes.

“In terms of industry supervision and compliance, digital collections are a new type of business, and laws, regulations and regulatory policies will be gradually improved, so there are some uncertainties,” Yu said. “Platforms have clear responsibilities for the issuance and trading of digital collections. Compared with intellectual property rights and digital copyrights, digital collections face greater compliance risks.”

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