China’s NFT ruling seeks to ‘cool down hype,’ Hong Kong lawyers say

The past few years have been quite a journey for non-fungible tokens (NFTs), from niche art collectibles to marketing tools for major global corporations. To be sure, what often follows hype is regulation.

China became the latest country to offer a major ruling in its first-ever case dealing with NFTs – and the copyright infringements they sometimes struggle with – at the Hangzhou Internet Court in April. In its decision, the court held NFT marketplaces liable for poor review of copyright infringement on the database, imposing stricter burdens on them than on e-commerce platforms that enjoy the protection of the “safe harbor rule.”

For lawyers operating in blockchain and digital assets in Hong Kong, it is not too surprising that a country that banned cryptocurrency trading last year is making a move that could prevent aspiring NFT entrepreneurs from entering the market.

Regardless of which side of the view they fall on, however, lawyers find the ruling highlights one of China’s growing internal struggles: a longing to be on the cutting edge of the latest technology while harboring a deep wariness about the financialization of digitization. assets.

Horace Lam, co-head of DLA Piper’s intellectual property and technology practice in Asia, said that while he believes China’s reticence in the NFT space may have “suppressed” user interest, his firm does not find the latest ruling unreasonable.

“This ruling in particular increases the burdens on NFT marketplaces and may cause them to hesitate to enter the Chinese market. However, the obligations set by the court are, in our view, not overly unreasonable or excessive and have their merits when considering the particular technicalities of NFTs, Lam said.

By “special technical features”, Lam refers to NFTs’ automatic entry into circulation when minted, “so if an NFT is subsequently cancelled… the entire chain of transactions will be affected.”

“The court here only requires that the marketplace use reasonable efforts to verify the copyright of each underlying work, such as asking its users to submit prima facie evidence to prove copyright ownership, and providing warranties, if necessary, before a user can coin an NFT based on the work through the platform,” he added.

Still, weeks after the ruling, China’s most popular messaging platform WeChat — with 1.1 billion users — updated its policies to “restrict the function of” or ban all accounts offering cryptocurrency and NFT-related services. Lawyers and Chinese journalists believe it is possible that the Hangzhou court ruling’s spillover effects have led regulators further into social media policies concerning the digital asset space.

“Reading this new rule, our feeling is that WeChat [wants] to limit any financial use of digital assets or relevant campaigns on their platforms, in order to avoid potential legal liabilities, given China’s extremely conservative stance on the financialization of digital assets,” said Lam.

While it is true that China has had a conservative policy towards digital assets, the gray area in which users find themselves is due to the government’s staggered stance – sometimes issuing statements suggesting acceptance of NFTs, while at other times narrowing the landscape in total. This is also reflected in the policy. For example, while some NFTs are allowed to be traded in fiat currency, the resale of tokens is expressly prohibited, which Lam sees as “suppressing the economic properties of NFTs.”

Despite management hesitancy, however, China is the fourth-largest home to NFT users, according to data from Statista, and lawyers say the future of the digital asset landscape is generally bright in the country.

Joshua Chu, a Hong Kong lawyer and chief risk officer at blockchain company Coinllectibles, finds the ruling apt, but also a signal that China is trying to “cool down the hype so that the sector can mature to sync with the hype” around blockchain technology. . To be sure, he does not see China’s tough stance on NFTs as permanent.

“The various actions taken by regulators are clearly designed for [prevent hype-driven trade] and give regulators themselves the opportunity to observe how other jurisdictions deal with the problem before taking action themselves, Chu said. “The Chinese government is known for the long game, and all signs point to an observe, orient, decide and act strategy currently in play.”

For most NFT marketplaces, however, the court decision was a “wake-up call,” Chu said. And contrary to fears among NFT users in the country, he believes the regulation and security are likely to encourage more players to enter the game – primarily because China’s priorities lie in expanding its technological reach.

The decision may have been China’s first in the space, but Chu noted that governments everywhere are likely to see a trend toward caution toward new technologies like NFTs, largely having learned from the growth of e-commerce platforms like Amazon, which “went through periods of hype and correction until it is what it is today.”