A Peculiar Flavor of NFTs Is Thriving in China – One Regulators Can Abide

In April 2021, China hosted what cryptocurrency and art media outlets heralded as the world’s first “major” crypto art exhibit.

At the opening, the gallery in 798, Beijing’s trendy art district, was buzzing with excited guests, including a Financial Times reporter who walked around an exhibition space densely packed with LCD screens showing the crème de la crème of non-fungible token (NFT) art: Beeples and CryptoPunks, among others. The show did so well it got an extended run in Shanghai.

To many, it felt like China, despite its complicated relationship with cryptocurrency, could at least be a hub for NFT art.

About a month after the opening, Chinese regulators outlawed crypto trading and mining once again, rattling the NFT community. In the months that followed, however, NFTs were considered to be somewhat safe from regulation because they weren’t yet clearly classified as potentially risky financial instruments. It became hard to find a crypto company, or bro, in China that wasn’t starting an NFT hustle.

Today, something has changed. The exhibition’s two curators say they are still hopeful about China’s ecosystem for NFTs, but both are looking for new opportunities away from the country.

“Great creator artists, they will come to like the real Web3 because it is what they really stand for and there also is a global market,” explained Qinwen Wang, China community leader at blockchain project Polkadot and one of the curators of last year’s “Virtual Niche: Have you ever seen a meme in the mirror?” exhibition.

Wang is currently in Los Angeles, learning about the U.S. market. She plans to permanently relocate to New York, where she wants to act as a bridge between the East and West.

The fact that she has moved to the U.S. is indicative of a wider shift that has taken place in China: NFTs remain alive and well in the country by several measures, but they are not what you’d expect. They might look like the low-resolution, funkily clothed avatars seen in freewheeling international markets, but in China there are fundamental differences.

They exist in a regulatory gray area, without clear and comprehensive laws. NFTs are not banned in China, but they can’t be bought with crypto and can’t be used as a speculative investment, as traders often do elsewhere in the world.

The view of Chinese authorities is shown in the very name: They are called “digital collectibles,” not NFTs. Big Chinese tech firms Ant Group and Tencent changed the NFT references on their sites to “digital collectibles” in October, likely a move to distance the products from their global crypto counterparts.

Rather than open networks that anyone can use, such as the Ethereum blockchain, in China the collectibles are built primarily on permissioned blockchains amendable only by authorized parties. This gives companies and the authorities greater control over the content. Rather than startups like OpenSea, several Chinese NFT auctioning platforms are built by well-established Web2 tech firms. The government and corporations are trying to curb the “financialization” of NFTs, meaning stop the popular speculative investment that took place during the last crypto bubble.

“There will be legislation passed to prohibit the use of this kind of technology to build any kind of regulated financial services,” said Yifan He, CEO of blockchain development firm Red Date Technology.

Like much of China’s regulation, such as its Great Firewall that blocks certain parts of the internet, this model attempts to rein in aspects of the technology that are deemed undesirable to its authoritarian regime. More than an experiment, China’s model could become a blueprint for other regulators in the region and globally. Already, Singapore’s central bank, for example, has started parroting some of Beijing’s language about crypto speculation.

Read more: Singapore's Central Bank Wants to Foster Digital Assets, Restrict Crypto Speculation

Legal trading

China’s legal market in “digital collectibles” is booming: Metaverse-focused information platform Gyroscope Finance estimates that as of June, 681 NFT trading platforms exist in China and that since March, 100 new platforms have been set up each month. But, all in all, “NFTs in China [are] not developed under the premise of a free market. It’s more like digital art, which is easy to buy but is hard to sell,” said Peng Chi, a visual artist from China who has used the technology for his work.

BlockCreateArt’s co-founder, Sun Bohan, quoted data from Lead Leopard Research, which found that about 4.56 million NFTs worth $150 million were sold in China in 2021.

On Weibo, China’s Twitter equivalent, the hashtag #digitalcollectibles has been viewed over 350 million times. Others, related to specific NFT drops or memes, have received widespread attention.

However, the platforms usually don’t allow NFTs to be resold for at least a set period of time, to curb retail traders from “speculating” – a word Chinese regulators often use as a reprimand against the crypto market overall. Crypto, which has been banned in the country as a transaction method, can’t be used to buy NFTs.

“China is quite interested in the NFT market, but will only support the NFT market under the Chinese system, the federated chain system and the digital RMB [yuan] system,” said Sun, who initiated and curated the April 2021 exhibition as co-founder of Beijing-based Block Create Art (BCA).

“NFT projects derived in this context [without crypto] will still evolve around these centralized guidance directions and cannot be called a pure and complete NFT market,” said Sun, who, like co-curator Wang, is currently in the U.S. to open a Web3 gallery in Los Angeles and connect his business with the North America and Southeast Asian markets.

Black market JPEGs

In addition to regional NFT marketplaces, many Chinese citizens have access to marketplaces like OpenSea and Magic Eden by using virtual private networks (VPN), which can bypass China’s internet firewall blocking content deemed unsavory by censors.

It’s estimated that 31% of internet users in China have some type of access to a VPN, and among these users NFT trading remains popular.

According to data from DappRadar, China is one of the countries that sends the most visitors to its NFT pages. However, relative to its population, China ranks low. Over time the number of people across the globe turning to DappRadar’s NFT pages has declined, according to data the company supplied. This is a trend that has echoed across crypto markets this year because of economic events and major crypto companies collapsing including stablecoin issuer Terra, hedge fund Three Arrows Capital and centralized finance lender Celsius Network.

OpenSea and Magic Eden both declined CoinDesk’s request for comment on the estimated number of Chinese VPN users who trade on their platforms.

Regulatory uncertainty

There is no national policy on NFTs in China to define what platforms can and can’t do. This creates compliance risks for creators, platforms and brands active in the space, who have no clear compliance guidelines, said Nassim Toui, communications manager at venture capital firm Sino Global Capital.

In April, three banking industry associations issued a statement looking to “resolutely curb” the financialization of NFTs, meaning financial risks related to hyping the assets, money laundering and other illegal activities.

While their statements don’t carry legal validity, industry associations in China issue standards and self-regulatory statements that can be a precursor to or substitute for government regulation.

Some of these associations issued a statement condemning crypto on May 18, 2021, just days before Chinese regulators announced a renewed crackdown on the industry.

There are many investors hoping to benefit from NFTs in China, but they are “just looking for profits between the cracks,” said artist Chi. “Because of no sound regulations, probably the life cycle of China’s NFT will be greatly shortened. In the long run, I'm not optimistic.”

At the same time, regulators see value in NFT technology beyond art. Red Date Technology, a state-backed firm that is building an “internet of blockchains,” has created a multi-chain platform for developers to build and launch NFTs. Red Date claim that transactions on this platform surpassed the Ethereum mainnet’s daily volume on June 29 and Aug. 18. CoinDesk has no way of independently verifying Red Date’s data.

At the same time, at least one local government policy calls for further investment and development of NFTs and the metaverse. The city of Shanghai called for the development of the industry in its latest five-year plan, published in June, particularly for the protection and circulation of intellectual property.

The government’s main concerns are financial and cultural, BlockCreateArt’s Sun said. As long as people don’t invest unwisely and lose their money, or use NFTs to promote political, violent or pornographic content, the government will not try to eliminate the industry.

“It's not the right time yet” for regulation, Red Date CEO He told CoinDesk, adding that it may take another six months or even one year “for the regulator to fully understand [NFTs], for them to see that the market has become mature, and that they know where to regulate. Right now, they don't even know where to regulate.”

Wang sees regulation eventually coming to NFTs in China to clarify the rules regarding public chains like Ethereum and crypto payments for purchases.

According to the set of rules that came into effect in 2019, all blockchain service providers must register with the Cyberspace Administration of China (CAC), the top internet regulator. They must also follow a host of other rules, such as performing real-name identification checks, censor content on their platforms and store user data.

Due in part to these regulations, digital collectibles in China use homegrown layer 1, or base, blockchains. For example, Ant Group's digital collectibles platform Jingtan issued all its digital collections on its own AntChain.

The BSN has created a set of localized versions of permissionless blockchains like Ethereum and Cosmos.

In late July, at least one-quarter of the CAC’s list of approved blockchain licenses were NFT platforms, up from 2% in the previous batch, wrote Beijing-based political affairs consultancy Trivium China in its newsletter.

Big names test the water

Big Tech has rushed to enter the market, and to show regulators they are doing so in a compliant way.

Major tech companies have launched their own Chinese NFT platforms and are looking to get in on the action. Alibaba and its affiliate Ant Group, Tencent, Baidu, and JD.com are among the tech giants that have launched their own platforms or NFT collections.

Alibaba, Ant Group and Tencent declined to comment for this story.

In June, Tencent’s super-app WeChat, through which much of China’s digital life is conducted, changed its content policy to ban content related to NFT trading.

Just days later, 30 institutions issued a self-regulation code in which they promised to resist the financialization of NFTs and adhere to rules about licensing and real-name authentication. Ant Group, Baidu, Tencent and JD.com signed the document.

However, with platforms mostly doing single sales for each digital collectible – meaning each NFT can only be sold once for a certain period of time – their potential for transaction commissions is significantly lower than for their international counterparts. Tencent closed one of two NFT platforms in order to cut costs, Chinese media outlet Jiemian reported in July 20.

Similarly, big brands have entered the field: There are some successful examples of marketing using NFTs, such as sportswear brands Li-Ning’s latest marketing event in Beijing’s trendy Sanlitun neighborhood using Bored Ape Yacht Club, said Wang. However, not all big brands are necessarily savvy enough to do NFT drops, and some celebrities are afraid they could be doing the wrong thing, she said.

Some big tech firms are doing NFT drops overseas, such as streaming platform Bilibili and social e-commerce site Xiaohongshu. While they are very conservative at home, these companies are participating in Web3 outside the great firewall, Wang said.

Red Date’s He said that on the DDC platform the majority of traded NFTs – around 70% – constitutes digital merchandise, such as paintings and images sold by brands. These are sometimes combined with offline elements, meaning buying an NFT grants consumers access to some limited-edition physical goods, He said.

There are more novel applications of NFTs, such as event tickets, but these are sparse. “We see a lot of good ideas,” but they are far from implementation, He said.

Lingling Xiang translated the interview with Peng Chi.