Hainan issues digital treasure supervision notice. How to interpret the first NFT regulation in the new year?

It is reported that the Market Supervision Administration, Propaganda Department, Cyberspace Administration, Department of Industry and Information Technology, Department of Culture and Tourism, Department of Commerce, Public Security Department, Financial Bureau, Taxation Bureau, and Communications Bureau of a southern province jointly issued: "Notice on Strengthening Risk Supervision of Digital Collections" (hereinafter referred to as the "Notice") to strengthen supervision of risks of digital collections in the province.

Looking at the full text of the notice, we can summarize three points: 1. Digital collections belong to the digital economy and will not be "one size fits all" ; 2. Digital collections are in chaos and there are hidden dangers of illegal crimes; 3. The regulatory authorities will adopt an "active supervision" strategy. So, let's study the notice together and see the analysis.

1. License Management

The digital storage industry should obtain different licenses based on its specific business type. As time goes by, our team believes that some licenses have changed, and the license management policies of different provinces and cities have also changed. It is recommended to consult directly with the local licensing department or leave a message at the end of the article and the Sajie team will reply to you.

If a business starts without obtaining business qualifications, the legal risks are divided into two categories.

The first category is the crime of illegal business operation, which usually disrupts the market order and can only be constituted in serious circumstances . Specifically, there are four main categories: (i) operating the monopoly or exclusive sale of goods or other restricted goods stipulated by laws and administrative regulations without permission; (ii) buying and selling import and export licenses, import and export certificates of origin and other business licenses or approval documents stipulated by laws and administrative regulations; (iii) illegally operating securities, futures, insurance businesses, or illegally engaging in fund payment and settlement businesses without the approval of relevant state authorities; (iv) other illegal business operations that seriously disrupt the market order. In judicial practice, if digital treasures are identified as securities or futures products, unlicensed operations have a greater risk of illegal business operations.

The other is illegal behavior. Operating digital collections without obtaining relevant administrative licenses will incur administrative violations . Regulatory authorities can regulate or punish in accordance with the "Artwork Management Measures", "Auction Law", "Internet Information Service Management Measures", etc. Do not think that administrative penalties are just paying money. The industrial and commercial and market supervision departments can impose administrative penalties on companies that operate without a license and the circumstances are serious, such as revoking the business license of the company, depriving the company of its ability to continue to engage in business activities, which is the most severe administrative penalty for companies.

II. Coordination between the enforcement and criminal prosecution of false advertising

To be honest, given the long-term sluggishness of the digital collectibles market, various platforms and service providers have tried their best to attract users. Some use football match results to promote sales, some combine online and offline to win traffic, and some use gambling to stimulate consumption . It is a mixed bag, and it is very lively.

In the past, the above chaos was mostly dealt with by criticism, exposure or revocation of business licenses, but the operators were unmoved. The notice specifically emphasized "strengthening the connection between law enforcement and punishment, and resolutely cracking down on false advertising crimes." So, what is the specific crime of false advertising? How many years can it be sentenced?

According to Article 222 of the Criminal Law of the People's Republic of China, the crime of false advertising refers to the act of an advertiser, advertising operator or advertising publisher violating state regulations and using advertising to make false propaganda for goods or services, with serious circumstances. Based on the experience of the Sister Sa Group in handling illegal fund-raising cases, if an advertiser violates state regulations and uses the name of Shuzang to make false propaganda for the purpose of illegal fund-raising, he will be convicted and punished for the crime of false advertising if he meets any of the following circumstances : (1) the amount of illegal income is more than 100,000 yuan; (2) it causes serious consequences or adverse social impact; (3) he has been subject to administrative penalties for using advertising for false propaganda more than twice within two years; (4) other serious circumstances.

It should be noted that both natural persons and organizations can be guilty of false advertising. In terms of sentencing, natural persons may be sentenced to fixed-term imprisonment of not more than two years or criminal detention, and may be fined or fined alone . For organizational crimes, the "double punishment system" is adopted, in which both the organization is fined and the directly responsible supervisors and other directly responsible persons are held criminally liable in accordance with the crimes committed by natural persons.

3. Fraud and Illegal Fund Raising

The "Notice" specifically named "white list, regular repurchase, cash rewards" and other behaviors. The Sister Sa team specially reminded: repurchase, cash rewards, etc. are sensitive behaviors in the current digital treasure industry. Such behaviors first face the criminal risk of illegal fundraising .

Take repurchase as an example. As a special sales method, repurchase can generally be a legal means of business operation. However, in the actual situation of the digital treasure industry, this repurchase method is often used by criminals as a means of illegal fundraising . In fact, not only digital treasures, but other commodities may also be used as gimmicks and tools for illegal fundraising. The judicial authorities have confirmed this through judicial interpretation. The newly revised "Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Laws in the Trial of Criminal Cases of Illegal Fundraising" in 2022 clearly lists commodity repurchase as a common method of illegal fundraising.

According to Article 2 of the judicial interpretation, if a person does not have the actual content of selling goods or providing services or does not have the main purpose of selling goods or providing services , and illegally absorbs funds by means of commodity repurchase, consignment and sale, etc., on the basis of meeting other requirements, he can be deemed to have committed the crime of illegally absorbing public deposits and be punished by criminal law. In practice, there are cases of absorbing funds by repurchasing liquor and jade.

Although Shucang is not a physical object such as liquor or jade, if the platform agrees with users in advance that it will repurchase the products at a price that is a certain percentage higher than the original selling price when the platform ceases operations, and explicitly or implicitly states in external publicity that the Shucang product is an investment product that can generate fixed returns, then, considering that users can only view their collections through the platform after purchasing Shucang, then in fact this business operation model is not much different from the aforementioned liquor repurchase model , and therefore there is also a high possibility that it constitutes illegal fund-raising.

4. Copyright Infringement

Copyright infringement is a common problem in the digital collection industry. The "Notice" uses the word "copyright", which is actually the "copyright" under Chinese law, prohibiting any organization or individual from using other people's works to cast and produce digital collections without authorization .

In practice, the most difficult case is the UGC platform . The first case in the industry that caused a sensation last year was actually a UGC platform user infringement case. Let's put aside the controversy of the case and today mainly tell you how to control the infringement problem to the minimum extent.

We recommend:

1. The platform needs to establish a more complete rights review mechanism to prevent infringing works from being cast into the chain . In the actual implementation process, the Sajie team suggested that the platform should require uploaders to provide documents such as proof of creation and proof of authorization on the one hand; on the other hand, it needs to have a more complete verification mechanism. For example, when storing pictures in the digital archive, multiple professional image recognition tools can be used to review the uploaded pictures, and special personnel can be assigned to review the results to prevent infringing works from being cast into the digital archive to the greatest extent.

2. Establish a smooth channel for users to report and complain . This is important for early detection and disposal of infringing works, and is also an important aspect for regulators to assess platform compliance.

3. Limit the user's right to set prices freely and detect abnormal transactions . In practice, the Sajie team found that some UGC platforms currently allow users to set prices freely, which leads to the frequent appearance of some outrageously priced collections on the platform. Such collections hide greater risks such as money laundering and cross-trading, and are easily used as criminal tools by those with bad intentions. Platforms need to be cautious.

4. Be cautious when charging revenue and gas fees . In current judicial practice, the court believes that UGC platforms directly obtain greater economic benefits from the content uploaded by users, and therefore need to bear a higher duty of care to prevent infringement. Therefore, the industry needs to think more deeply about traditional charging standards and profit models, and distinguish between the cost of on-chain and the platform revenue to prevent risk exposure.

5. Secondary Market Issues

The Notice clearly states that: Illegally established exchanges must be resolutely banned , and the access management, daily supervision, statistical monitoring, and risk management of exchanges must be carried out in accordance with the implementation rules of the Hainan Province Trading Venue Management Measures. At present, China has not issued any higher-level laws or administrative regulations to clarify the nature of the establishment of a secondary market for digital assets. However, from the perspective of maintaining financial security and social stability, China's regulatory authorities generally have a negative attitude towards private secondary exchanges .

To be honest, the value of digital collections lies in their liquidity . If there is no trading channel, digital collections themselves are not valuable. Sister Sa’s team believes that in terms of solving liquidity, the “cultural exchanges” gradually established in various parts of China are a good idea. As a comprehensive cultural property exchange approved by the national financial regulatory authorities with property rights, debt rights, equity, intellectual property rights (copyright) and other trading objects, it itself has a deep connection with digital collections.

As for Hainan Province, Hainan International Cultural and Artworks Trading Center (hereinafter referred to as “Hainan International Cultural and Artworks Trading Center”) is the only joint-stock enterprise in China with online and offline art trading qualifications approved by the Hainan Provincial Financial Supervision and Administration Bureau. Although the secondary trading of digital collections has not yet been directly opened, there is bound to be great potential in the future. We suggest that platform operators pay close attention to the latest developments of cultural exchanges in various places.

VI. Strengthen joint acceptance of dishonesty cases and enhance publicity and education

The establishment of a dishonest system required by the Notice is actually a blacklist system . Hainan’s regulatory authorities will promptly collect and publicize the dishonest information of digital collection business enterprises, including administrative penalties, and list the dishonest market entities of digital collections in the abnormal operation list or the serious illegal dishonest list.

This practice will have a significant impact on all kinds of dishonest and illegal enterprises. Not only will it cause enterprises to lose their market basis for operation, but it will also have adverse effects on the main responsible persons of enterprises for a long time in the future, such as restrictions on employment. The Sajie team believes that referring to the blacklist system implemented in the financial industry, a system with more interaction between supervision and enterprises and stricter supervision will be explored in the future . The illegal costs of enterprises and their actual controllers have increased significantly, and extra attention needs to be paid .

Final Thoughts

We are pleased to see that the province has a high degree of recognition of the legality of digital collections. However, various departments have understood the chaos and risks brought by digital collections and have prepared response plans. What impressed us most was the "execution connection" regarding false advertising. We look forward to its shocking effect, and we also hope that companies will not go against the wind .