China’s banking association proposes restrictions on NFTs

The verdict that China’s web3 community has been waiting for months is here: NFTs, or the tokens used to prove the ownership and authenticity of an item, must not be used for securitization or transacted in cryptocurrencies, said China’s banking, securities and internet financial associations in an announcement on Wednesday.

China has already banned initial coin offerings, cryptocurrency transactions and crypto mining. Ruling out NFT’s financial possibilities could further distance the country from the web3 wave taking place in the rest of the world, which is building a decentralized internet on crypto tokens.

Despite its distaste for the freewheeling nature of crypto, China sees blockchain as a key infrastructure in building out its internet economy. An official from the country’s Securities Regulatory Commission recently hailed web3 as the future of the internet, saying it can solve problems from the Web 2.0 era such as the lack of privacy protection. Like other aspects of the blockchain-driven movement, China has defined its own version of NFTs that come with strings attached.

The problems of NFTs are the financial risks they beckon, according to the three associations, which operate under the supervision of China’s financial regulators. The groups warn of speculative, money laundering and other illegal financial activities involving NFTs, but they also recognize the role NFTs could play in advancing China’s digital and creative economy, for instance, by enabling artists to exercise control over their artworks.

To stem NFTs’ financial risks and take advantage of the underlying technology, the associations issued a set of guidelines for the industry:

  • The underlying assets of NFTs should not include bonds, insurance, securities, precious metals or other financial assets.
  • NFT’s nonfungibility should not be weakened so as to indirectly facilitate initial coin offerings.
  • Platforms should not provide centralized exchanges for NFTs.
  • NFTs should not be transacted in cryptocurrencies.
  • Platforms should impose real-identity checks on and store transaction records of customers to root out money laundering.
  • Entities should not directly or indirectly provide financing support to NFT investments.

Technology giants have already played along with Chinese regulators in their NFT endeavors. Bilibili, Tencent and Alibaba-affiliated Ant Group have created permissioned blockchains where creators can mint and sell their works, which are limited to designated participants and separate from the open Ethereum network. Transactions are done only in Chinese yuan and the marketplaces don’t permit reselling as OpenSea and other global exchanges do. Chinese tech companies are also branding NFTs as “digital collectibles” to distance themselves from the crypto world.