The last few years have been quite a journey for nonfungible tokens (NFTs), going from niche art collectibles to marketing tools for major global corporations. To be sure, what often follows hype is regulation.
China became the latest country to offer a key regulatory framework in its first-ever case dealing with NFTs—and the copyright violations they are sometimes saddled with—in Hangzhou Internet Court in April. In its decision, the court held NFT marketplaces liable for poor vetting of copyright violations on its database, imposing stricter burdens on them than on e-commerce platforms that enjoy the protection of the “safe harbor rule.”
For attorneys operating in the blockchain and digital asset space in Hong Kong, it isn’t too much of a surprise that a country that outlawed cryptocurrency trading last year is making a move that might discourage ambitious NFT entrepreneurs from entering the market.
Regardless of which side of the opinion they may fall, however, attorneys find that the ruling highlights one of China’s growing internal struggles: a longing to be on the cusp of the latest technology, all the while bearing a deep wariness about the financialization of digital assets.
Horace Lam, co-head of DLA Piper’s Intellectual Property and Technology practice in Asia, said that, while he believes China’s reticence around the NFT space may have “suppressed” user interest, his firm doesn’t find the latest ruling unreasonable.
“This ruling, notably, increases the burdens on NFT marketplaces and may cause them to hesitate to enter the Chinese market. However, the obligations set out by the court are, in our view, not overly unreasonable or excessive and do have their merits when considering the special technical features of NFTs,” Lam said.
By “special technical features,” Lam is referring to NFTs’ automatic entry into circulation once they are minted, “so if an NFT is later canceled … the entire chain of transactions will be impacted.”
“The court here only requires the marketplace to use reasonable efforts to verify the copyright ownership of each underlying work, such as asking their users to submit prima facie evidence to prove copyright ownership, and providing guarantees, if necessary, before a user can mint an NFT based on the work through the platform,” he added.
Still, weeks after the ruling, China’s most popular messaging platform WeChat—with 1.1 billion users—updated its policies to “limit the function of” or ban all accounts that offer cryptocurrency and NFT-related services. Attorneys and Chinese journalists think it is possible that the Hangzhou court ruling’s ripple effects have directed regulators further into social media policies that concern the digital asset space.
“By reading this new rule, our feeling is that WeChat [wants] to restrict any financial use of digital assets or any relevant promotions on its platforms, so as to avoid potential legal liabilities, given China’s extremely conservative attitude towards the financialization of digital assets,” Lam said.
While it is true that China has had conservative policies toward digital assets, the grey area users find themselves in is due to the government waffling on its stance—occasionally releasing statements that suggest an acceptance of NFTs, while at other times restricting the landscape altogether. This is reflected in policy as well. For example, while some NFTs are allowed to be traded in fiat currency, the reselling of tokens is expressly prohibited, which as Lam sees it “depress the financial characteristics of NFTs.”
In spite of hesitation from its leadership, however, China is the fourth-largest home of NFT users, according to data from Statista, and attorneys say the future of the digital asset landscape is generally bright in the country.
Joshua Chu, a Hong Kong attorney and chief risk officer at blockchain company Coinllectibles, finds the ruling apt, but also a signal that China is attempting to “cool down the hype so that the sector can mature to sync with the hype” around blockchain technology. To be sure, he doesn’t see China’s hard stance on NFTs as permanent.
“The various actions taken by regulators are clearly designed to [prevent hype-driven trade] and give the regulators themselves the opportunity to observe how other jurisdictions are doing tackling the issue before taking actions themselves,” Chu said. “The Chinese government is famous for the long game, and all signs point to an observe, orient, decide, and act strategy being in play at the moment.”
For most NFT marketplaces, however, the court ruling was a “wake-up call,” Chu said. And contrary to fears among NFT users in the country, he believes that the regulation and safety are likely to encourage more players to enter the game—primarily because China’s priorities lie in expanding its technological reach.
The decision might have been China’s first in the space, but Chu noted that governments everywhere are likely to see a trend of cautiousness toward new technology like NFTs, largely after learning from the growth of e-commerce platforms like Amazon, which “went through periods of hype and correction until it is what it is today.”
