Chinese prosecutors to crack down on 'pseudo innovation' in NFTChina is taking a proactive stance against the risks associated with Non-Fungible Tokens (NFTs). As the popularity of these digital asset certificates continue to surge, so do the risks associated with them, from financial to legal, and everything in between.
Pseudo-innovation vs. true innovation
China’s prosecutorial organs are tasked with navigating the fine line between genuine development and criminal activity. In the burgeoning world of NFTs, there’s a clear mandate to protect what Wang Xiafang refers to as “true innovation.”
However, authorities are equally committed to identifying and penalizing “pseudo-innovation” — schemes designed to exploit the system under the guise of innovation, ultimately driving out the good.
The NFT marketplace involves a complex web of stakeholders: copyright owners, creators, platforms, and buyers. Ideally, the copyright owner and creator are the same, promoting a smoother transaction process.
But in cases where these roles don’t overlap, the platform’s compliance with copyright law becomes crucial, says Sun Shan.
Digital collections, an application form of NFTs, hold vast potential but come with their share of risks. These unique digital certificates created by specific works and supported by blockchain technology represent the assetization of digital content.
China’s government is encouraging the development of this cultural and digital industry. However, the unregulated and hasty growth of digital collections can result in a multitude of risks, including illegal fundraising, fraud, and malicious hype.
Ruan Shenyu also points out that consumers don’t enjoy full ownership of the NFT digital assets they purchase. They can only prohibit others from altering the ownership of the NFT recorded on the blockchain.
China has already begun to address these concerns. In April 2022, the “Initiative on Preventing NFT-related Financial Risks” was launched to curb the disorderly growth of the industry.
Some digital collection platforms now prohibit secondary transfers or only support free transfers under restricted conditions.
However, there are still platforms openly or covertly allowing secondary transactions, which bear striking resemblance to the prohibited continuously listed transactions specified in the “Initiative.”
The inflated prices of some collections, driven by marketing strategies such as “airdrops” and “blind boxes,” create an unsustainable market bubble. The concern is further exacerbated when NFTs lose their uniqueness due to mass production, affecting their non-homogeneous properties.
China’s multifaceted approach
China’s prosecutorial organs are diligently working to accurately crack down on criminal activities disguised as new technologies. They aim to delineate the industry’s “red line” and protect the public’s interest while ensuring legal compliance.
The second prong of the approach is to guide the industry to strengthen its compliance, enrich high-quality application scenarios, and explore paths for digital collections to empower economic development.
Finally, China is committed to strengthening risk research, judgment, and law popularization. This involves collaborating with relevant regulatory authorities, conducting an in-depth risk analysis, providing guidance for financial risk prevention, and improving the regulatory system.
Additionally, it’s important to educate consumers about the potential price, financial, and policy risks associated with digital collections. Efforts are underway to help consumers discern illegal financial activities masked by the allure of NFTs and metaverse concepts.
The procuratorial organs are tasked with debunking the myths of “high yield” and “value preservation,” which often serve as bait for unsuspecting investors to fall into fraudulent financial schemes.
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