China looks to create an NFT market on its own terms
Google search data indicates that Chinese consumers have a massive appetite for information on NFTs (non-fungible tokens) with searches for the term being made much more frequently in the Middle Kingdom than in any of the other 70 countries surveyed.
Of course, they displayed similar enthusiasm for cryptocurrency before their government deemed virtual currency-related activities to be illegal financial activity.
But rather than ban NFT issuance, China is attempting to control the market by creating its own infrastructure that requires users to verify their identities and allows for state intervention where it suspects illegal activity is taking place.
In late January, the state-backed Blockchain Services Network (BSN) announced it was developing infrastructure to enable NFT issuance.
An NFT by any other name
Public blockchains were banned in China last year because of their perceived role in fraud and money laundering, so BSN mints and stores what it calls decentralized digital certificates or DDCs, rather than NFTs, on open permissioned blockchains.
Tim Bailey is vice president of global sales at Red Date Technology, which provides the technology behind BSN.
He says the renaming of NFTs as DDCs reflects the company’s belief that the technology is suitable for universal digital certification purposes that go beyond digital art and copyrights.
BSN will accept fiat payments – Photo: Shutterstock“All the official DDCs will be on open permissioned blockchains, which combine features of public and permissioned chains,” he adds.
Fiat, not crypto, payments
China has been careful to separate BSN and cryptocurrency, especially when it comes to exchanging value.
All payments on the network will be made in fiat currency via traditional non-crypto means such as bank cards, Alipay or WeChat Pay to comply with local regulations.
Further details of the project are expected to be confirmed in March.
China’s digital ecosystem is well-suited to NFT collectibles as internet celebrities have been finding innovative ways to show off wealth, fashion and culture on networks like Weibo and TikTok, observes Ben Yorke, vice president at DeFi platform liquidity network Woo Network.
Part of the five-year plan
It is unsurprising that China is embracing NFTs given its stated enthusiasm for blockchain technology. In October 2019, President Xi Jinping told the Political Bureau of the Central Committee that blockchain had many possible applications and described it as “an important breakthrough for independent innovation of core technologies”.
In 2021 blockchain was referenced in China’s 14th five-year plan as a “key digital technology”.
‘Internet with Chinese characteristics’
Yale Law School students Brian Liu and Raquel Leslie say that Chinese authorities never officially declared NFTs illegal, although Tencent and Alibaba were careful to refer to their tokens as digital collectibles.
The Chinese tech titans have reportedly signed a self-regulation convention on NFTs whose principles include “working with controllable consortium chains”, “ending virtual currencies”, “preventing speculation and financial risks” and “preventing money laundering”.
Liu and Leslie note that China’s treatment of NFTs and blockchain technology fits into a broader pattern of Beijing’s effort to build an “internet with Chinese characteristics” and shows its regulators are able to tread the fine line between cracking down on and co-opting potentially subversive technology.
China Briefing editor Zhou Qian – Photo: China BriefingZhou Qian is the Shanghai-based editor of China Briefing, published by professional services firm Dezan Shira & Associates.
NFTs provide IP protection
Zhou says that in China, NFT are regarded as virtual collectibles that can help to improve IP protection rather than tokens that may increase speculation – a view that will cause amusement in some quarters given previous claims that Chinese IP theft has cost the US hundreds of billions of dollars a year.
So are Chinese digital asset traders simply substituting NFTs for cryptocurrencies, thus creating the kind of speculation China is trying to avoid by banning cryptocurrency trading?
The answer is ‘no’ according to Bailey, who says that Chinese regulators have issued regulations guidelines on sale frequency and holding times to prevent price speculation.
“Although certain digital asset traders may hold such a mindset, the precondition for the existence of NFTs in China is that they are decoupled from cryptocurrencies and speculation and this is expected to be enhanced in future regulation,” says Zhou.
“In addition, China’s strict ban on cryptocurrencies has a warning effect on both issuers and investors.”
“Acceptable” speculation
Angel Zhong, a senior lecturer in finance at RMIT School of Economics and trading trends expert takes a different view, suggesting that China may use BSN to control speculation – or to put it in another way, allow speculation to exist at an acceptable level.
Crypto-savvy Chinese users are involved in the NFT scene, but it is a much more niche market according to Yorke. “Digital asset traders are still finding ways to trade, although the market seems a lot quieter due to the recent decrease in asset prices,” he adds.
But Zennon Kapron, managing director of Asian fintech strategic consulting firm Kapronasia, is not convinced China will be able to keep a lid on speculation.
“Although not specifically designed to be stores of value or mediums of exchange, NFTs have become both,” he says.
“It is hard to see an implementation of NFTs on the BSN that would control the rampant speculation and retail trader risk that China sought to eliminate by banning crypto in the first place.”
Secondary NFT trading issues
Since Alibaba and Tencent have banned the reselling of NFTs, it is also reasonable to ask if China will ever have a domestic secondary market for token trading. Bailey has his doubts, acknowledging that regulators will put in place restrictions to prevent the growth of such a market at least in the short to medium term.
One potential outcome is a secondary market that would be subject to licensing management, which would make it easier for market players to communicate with authorities and thus explore new transaction models and boundaries, suggests Zhou.
But Yorke is unconvinced, reckoning that while private blockchain platforms will emerge they are unlikely to develop into open marketplaces like OpenSea and that mainstream NFT projects would be unlikely to list there.
A digital Silk Road?
BSN will open a portal in Turkey – Photo: Shutterstock“One of the theories around China’s crypto ban is that it is readying to launch its own state-run crypto exchanges that would control many of the risks regulators and government see in crypto such as money laundering, tax evasion and capital controls,” says Kapron.
“Should this progress we may see them also incorporate NFTs, but the challenge remains how to manage the speculative nature of the digital asset.”
One of the most interesting aspects of BSN is its plans to open international portals in Turkey and Uzbekistan, both key staging posts on the Silk Road which used to trade goods between East and West and which suggests that China wants to become a global player in NFT issuance.
Bailey says that the network is currently available in China via 10 open permissioned blockchains but also wants to connect with global users.
China’s global blockchain ambitions
“We will enable cross-chain services among all these blockchains, as well as one-way transfers to the Ethereum mainnet and other public chains so that users from other countries can access NFT assets minted in China,” he says.
This prompts Kapron to make the remarkable observation that BSN could eventually support crypto and NFT trading everywhere except its home market.
“It is also a sign that China would like to leverage its economic significance and growth to create a different type of blockchain on which it could exert its influence,” says Zhong.
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