Fujian takes the lead in prohibiting trading venues from conducting NFT transactions.

Our reporter Wang Yongfei and Ran Xuedong from Beijing reported

As the popularity of NFT digital collections continues to rise, my country has gradually begun to take action to regulate NFTs.

Our reporter noticed that recently in the communities of multiple digital collection platforms, many consumers urged digital collection platforms that have not opened the consignment market to open the secondary market as soon as possible to facilitate speculation. In the case of an immature market and lack of supervision, the scale of the group participating in the speculation of digital collections is constantly expanding, and the risk of affecting market stability is also increasing.

Recently, a "Reminder Letter from the Fujian Province Working Group for Cleaning Up and Rectifying Various Types of Trading Venues on Preventing NFT Violation Risks" (hereinafter referred to as the "Reminder Letter") has been widely circulated on social media. The document mentions that in order to prevent the risk of trading venues participating in NFT activities in violation of regulations, four reminders are made regarding NFT-related activities involving trading venues in Fujian Province, including "not engaging in NFT transactions without approval, and not participating in NFT activities in disguised form in violation of regulations."

On June 10, a relevant person in charge of the Fujian Provincial Local Financial Supervision and Administration Bureau confirmed the authenticity of the document to a reporter from the China Times. The person in charge said: "The document requires that trading venues in Fujian Province should not carry out NFT trading-related activities. However, many NFT platforms in the market do not fall into the category of trading venues referred to in the document."

Regulating NFT-related activities on trading venues

The "Reminder Letter" circulated on social platforms recently. The reporter noticed that the document was issued by the Working Group for Cleaning Up and Rectifying Various Trading Venues of Fujian Province, and was stamped by the Fujian Provincial Local Financial Supervision and Administration Bureau. The document was issued on May 20, 2022.

The "Notice Letter" pointed out that a large number of NFT (Non-Fungible Token) products have appeared in the market recently. As an application of blockchain technology, NFT is easily associated with illegal activities such as fraud, speculation, and money laundering after financialization, triggering chain risks. It is required that trading venues in Fujian Province shall not engage in NFT transactions without approval. "At present, our province has not approved any trading venue to engage in NFT-related businesses. Trading venues shall not arbitrarily limit the number of NFT-related transactions or engage in NFT-related transactions in violation of regulations."

The "Reminder Letter" emphasizes that it is not allowed to participate in NFT activities in disguised forms in violation of regulations. Trading venues that participate in NFT issuance and trading activities in the name of co-sponsors, strategic partners, technical support parties, etc. are prone to be used by criminals to endorse illegal activities by using the compliance qualifications of trading venues. If the trading venue does not strictly control and leads to a large number of letters and visits complaints, measures such as blacklisting, suspension of business, and rectification will be taken until the qualification of the trading venue is revoked. In addition, the "Reminder Letter" points out that it is not allowed to develop other institutions to conduct business in violation of regulations, and trading venues are not allowed to develop members, agents, and authorized service agencies without approval to carry out NFT-related business activities in violation of regulations.

Regarding investor protection, the "Reminder Letter" stated that all trading venues should guide customers to establish correct trading concepts, consciously resist speculative behavior, and prevent trading products from being inflated and deviating from the law of value. If related illegal activities are found, they should be reported to the relevant departments in a timely manner.

Overall, the reminder letter requires all trading venues in Fujian Province not to participate in, endorse, or approve NFT-related issuance and trading activities.

On June 10, the relevant person in charge of the Fujian Provincial Local Financial Supervision and Administration Bureau confirmed the authenticity of the document to our reporter. The person in charge said: "The document requires that trading venues in Fujian Province shall not carry out NFT trading-related activities. Many NFT platforms in the market are not trading venues. We manage in accordance with the local financial supervision '7+4'."

According to the "Regulations on Local Financial Supervision and Administration (Draft for Comments)" issued by the central bank on December 31, 2021,

“7+4” financial organizations generally refer to non-mainstream financial organizations that are mainly local and professional companies.

Among them, "7" refers to microfinance companies, financial guarantee companies, regional equity markets, pawnshops, financial leasing companies, commercial factoring companies, and local asset management companies; "4" refers to various local trading venues, professional farmers' cooperatives that engage in credit mutual assistance, investment companies, and social crowdfunding institutions.

Xiao Sa, partner at Beijing Dacheng Law Firm, pointed out to reporters that the working group for cleaning up and rectifying various trading venues is still concerned about issues such as "speculation", "potential financialization", "illegal fundraising" and "illegal financial activities". These issues have already attracted the attention of the management authorities and they are preparing to give advance warnings, and do not rule out subsequent direct intervention.

NFT regulation is gradually improving

According to DappRader data, the transaction volume of OpenSea, the world's largest NFT market, has exceeded US$30 billion recently. As the NFT market expands, global NFT supervision is also gradually improving. However, my country's digital collection market has only become popular in 2021, and supervision is not yet mature.

The domestic regulation of NFT had the greatest impact on April 13, 2022, when the Internet Finance Association of China, the China Banking Association, and the China Securities Association issued an initiative on preventing NFT-related financial risks, proposing to resolutely curb the trend of NFT financialization and securitization, strictly guard against the risks of illegal financial activities, prevent inflated prices from deviating from the basic value laws, support genuine digital cultural and creative works, and protect consumers' right to know, right to choose, and right to fair trade.

On June 6, the Hong Kong Securities and Futures Commission issued a statement on its website to remind investors that NFTs, like other virtual assets, face higher risks, including insufficient liquidity in the secondary market, price fluctuations, lack of pricing transparency, hacker attacks and fraud. Investors should be aware of these risks and should not invest in these assets if they do not fully understand NFTs and cannot bear potential losses.

The Hong Kong Securities and Futures Commission believes that some NFTs cross the line between collectibles and financial assets, such as segmented or homogenized NFTs with structures similar to "securities" or especially rights under "collective investment schemes". If an NFT constitutes an interest under a collective investment scheme, the promotion or distribution of NFTs may constitute a "regulated activity". Anyone who conducts regulated activities (whether in Hong Kong or targeting Hong Kong investors) must be licensed by the Hong Kong Securities and Futures Commission unless exempted.

Regarding my country's supervision of NFTs, "onlineization and young users are the characteristics of NFT chaos governance, and the 'regulatory' authorities will definitely seize these characteristics and focus on regulation," Xiao Sa pointed out.