Chinese regulators target NFTs in the latest risk notice

TL;DR Breakdown

• Three Chinese financial and trade organizations have issued a joint statement warning investors about the dangers of investing in NFTs.
• Chinese crypto regulators and investors remain torn between the advantages and disadvantages of the decentralized industry.

In a recent alert, three Chinese financial and trade organizations have issued a joint statement cautioning investors about the hidden risks of NFT investing. The China Banking Association, the China Internet Finance Association, and the Securities Association of China issued a caution statement to investors on the NFT issue.

Chinese regulators take more unfriendly steps toward the crypto industry

The three organizations urged authorities to combat NFT speculation and securitization in a Wednesday statement. The Chinese entities intend to minimize the dangers of unlawful activities. The three companies issued risk alerts with the purpose of promoting innovation in the blockchain and cryptocurrency industry.

To prevent NFTs’ financial risks and take advantage of the underlying technology, China’s trade organizations released a set of standards for the sector: The underlying assets of NFTs should not include bonds, insurance, securities, precious metals, or other financial assets from now on. 

In addition, Chinese investors, developers, and traders should not use Bitcoin (BTC), Ether (ETH), and Tether (USDT) in the pricing and settlement of NFT transactions.

Also, platforms should perform real-name verification and adhere to anti-money laundering (AML) standards. Furthermore, the Chinese organizations and businesses that meet these requirements shouldn’t invest in NFTs or give financial assistance to others in doing so.

The other proposed code of conduct rules included not providing centralized transactions and avoiding weakening the tokens’ nonfungibility. This is done by generating ownership or batching in secret and conducting token issuance financing in disguise.

The Chinese organizations involved made the following remarks in a joint statement: “We solemnly call on consumers to establish correct consumption concepts, enhance their awareness of self-protection, consciously resist NFT speculation and speculation, be vigilant and stay away from NFT-related illegal financial activities, and effectively safeguard their property safety.”

 They also added, “If relevant illegal activities are found, they should be reported to the relevant departments in a timely manner.”

The divided economic stand on the NFT risk notice

Regulators in China have previously issued alerts to the public about cryptocurrency investments. They also urged member institutions to follow existing regulatory standards for digital assets.

In 2017, the government prohibited crypto exchanges from offering services. Many customers, however, were able to use their local bank accounts for crypto-related transactions before the People’s Bank of China began cracking down on the illegal crypto trade in 2021.

China has already banned initial coin offerings, cryptocurrency transactions, and crypto mining. The prospect of NFTs being viable financial options may further distance China from the web3 movement happening throughout the rest of the world. Web 3 takes center stage in building a decentralized internet on cryptocurrency tokens.

Despite its aversion to the free-wheeling nature of cryptocurrency, China considers blockchain as a key infrastructure in developing its internet economy. According to an official from the Chinese Securities Regulatory Commission, the future of the internet lies with web3 technology.

A Chinese official stated that web3 could tackle issues from the Web 2.0 era, such as a lack of privacy protection. China has established its version of NFTs, which come with conditions attached, much like other elements of the blockchain-driven movement.

According to the three organizations, which China’s financial regulators regulate, the risks of NFTs include financial risks that ultimately destabilize the economy. The organizations warn about speculative, money laundering, and other illegal financial transactions using NFTs.

However, they also recognize the potential of NFTs in promoting China’s digital and creative economy. For example, web3 can give artists the ability to manage their work. In 2022, some of China’s social media platforms, including WeChat, discontinued NFT platforms.

However, not all economic giants operational in China seem too shaken by the governments’ directive. For example, Alibaba Group launched an NFT marketplace in August 2021. Through the marketplace, users can list ownership rights to copyrights as tokens.  

Additionally, Bilibili and Tencent have established permissioned blockchains in which creators can produce and sell their content. Built on the ethereum network, these NFTs are controlled by a set of designated participants rather than the general public.