Compliance for NFTs and digital collectibles in China

By Zhang Feng, V&T Law Firm
0
265

Technically speaking, non-fungible tokens (NFTs) are issued based on blockchain, which makes the related digital products open, transparent, verifiable, reliable, scarce, unique, programable and designable, giving owners a totally new experience.

Related industries that provide services for the issuance, trading and use of NFT digital products or collectibles are also gradually developing. However, this emerging industry is still plagued with fundamental application-related issues, and the key points of NFT platform compliance require the close attention of companies.

The issues

张烽__Zhang_Feng__V_T-s
Zhang Feng
Partner
V&T Law Firm

Technical standards. At present, the technical standards for NFTs are not extensive enough, the product attributes through which the applications can be realised through access control, transmission and integration with apps are still relatively simple, and the wallets that support applications are also relatively few. These may limit the widespread application of NFTs.

Storage. From a technical standpoint, the issue of NFT metadata storage has yet to be effectively resolved. Limited by the storage capacity of the blockchain itself, only a small quantity of NFT metadata exist on the blockchain, with the remainder generally existing on the NFT issuer’s own servers. Storage models relying on decentralised forms, such as the InterPlanetary File System (IPFS), are yet to be developed.

Diversity of rights and interests. NFT currently only solves the issue of proving the rights of owners of digital works. With respect to how to technically ensure other rights and interests, including intellectual property rights, further exploration is required.

Extent of the digitisation of industries. The extent of informatisation and digitisation of many industries remains low and the infrastructure required to issue NFTs is insufficient, which hampers large-scale application.

Illegal activities. Some unsavoury elements will use NFTs for illegal financing, fraud and other such activities. Guarding against such activities requires higher identification costs, a point that will also affect the normal development of the NFT industry.

NFT platform compliance

An NFT platform is, in theory, a commodity trading and information aggregation platform. A platform does not serve as an NFT transaction broker, or as a financial institution, credit institution or security institution. A platform’s role is limited solely to facilitating trading between buyers and sellers.

As a website operator, carrying out of internet content provider (ICP) recordal is required. As long as a website is operating in China, this is required, and such recordal can be completed by the provider on whose servers the website is hosted.

As an internet information service provider, the procedures for an ICP permit (called an internet information service operation permit) need to be carried out. Such ICP permits are issued by the local communication authority. The business of for-profit ICPs mainly includes online advertising, web page production, app websites, fee-based information platform websites, and game websites.

As an e-commerce platform, market entity registration needs to be carried out. Even if a platform only serves as a platform that publishes and aggregates information, there is nevertheless a certain possibility that it could be deemed a platform operator. A platform operator is required to perform entity review and information publication obligations, as well as other relevant trading-related obligations.

As a for-profit online cultural activities platform, an application needs to be made to the cultural authority of the provincial-level government where it is located, for review and approval. Although an NFT itself is not primarily the creation of online cultural products, if consumption and trading are to be carried out, the products falling under the framework of such regulations are required to comply with the corresponding regulations, and the relevant qualifications and permits need to be secured.

As an online auction platform, an application for an auction permit needs to be made to the competent commerce authority of the provincial-level government. If the auction of cultural artefacts is involved, the permission of the cultural authority of the provincial-level government needs to be separately secured.

Pursuant to the Ministry of Commerce’s recommended national standards, the Code of Practice for Online Auction, to establish an online auction platform the following basic requirements need to be satisfied: (1) having rules that comply with such relevant laws, statutes, rules and regulations as the Auction Law; (2) having a computer information system that ensures the normal conduct of the online auction business; (3) having the relevant business procedures to conduct online auction activities; and (5) securing permission or recordal in accordance with the Measures for the Administration of Internet Information Services based on the nature of the platform.

As a blockchain application platform, an application for recordal/registration of blockchain information services needs to be made to the state cyberspace authority. A blockchain information service provider is required to fill in and submit such information as to its name, service category, service form, application area, server address, etc., and carry out the recordal procedures through the blockchain information service recordal management system of the Cyberspace Administration of China within 10 working days from the date on which it starts to provide a service.

NFT platforms are not targets of the inter-ministerial joint conference system for the clearing up and rectification of various trading venues established by the State Council. The State Council’s implementation opinion states: “The scope of the current clearing up and rectification includes various trading venues that engage in equity trading, commodity forwards trading, and other standardised contract trading, and includes trading venues that do not use the word ‘exchange’ in their names, but excludes trading venues that only engage in the trading of physical goods, such as vehicles, real estate, etc.”

In contrast, what an NFT platform conducts is trading in digital products, which does not fall into the categories of equity trading, commodity forwards trading, or any other standardised contract trading.

Depending on the specific business that a platform is involved in, it is required to simultaneously: (1) ensure user privacy; (2) warn of the risks inherent in blockchain technology applications so as to avert the platform being used for such illegal activities as money laundering, etc.; (3) clarify the relationship between NFTs and copyright protection; and (4) state the dispute resolution method.

Zhang Feng is a partner at V&T Law Firm. He can be contacted on +86 21 5081 9091 or by email at feng.zhang@vtlaw.cn

Law.asia subscripton ad red 2022