Thinking | NFT technology application and legal regulation

Authors of this article: Zhang Feng, partner of Wanshang Tianqin Law Firm; Wu Pingping, director of Tencent Group’s Legal Innovation Center.

For some time, people from the sports art world, the collecting world, the gaming and entertainment world, and other fields have all joined the NFT industry. Music artists have released songs and albums in the form of NFTs; Rolling Stone, Time Magazine, and Snowden have all announced the launch of NFTs; a digital composite work created by a digital artist named Beeple, Mike Winkelmann, sold for $69.3 million at a Christie's auction, which shocked the entire art world. eBay will allow the sale of NFTs of digital collectibles on its platform, becoming the first e-commerce company to enter the NFT field.

The industry, investment community and regulatory authorities are all closely watching this trend. What exactly is NFT application, what problems does it solve, and what problems does it have? How is NFT different from other digital cryptocurrencies? What legal logic should its issuance and trading comply with, and how should it be regulated? We start with the service experience of popular applications to summarize its product features, and further analyze the legal nature of NFT products and the relevant regulatory ideas of the NFT industry.

In this article, NFT (Non Fungible Token) refers to tokens of different qualities, NFT products are specific digital products formed by combining NFT, NFT industry refers to related industries surrounding NFT products such as NFT platforms, and NFT applications generally refer to the application of NFT in specific scenarios, products and industries.

It should be emphasized that the legal thinking on the development of NFT applications, the practice and exploration of the legal regulation of NFT products and industries have just begun. What we provide here is a framework, on the one hand, to more accurately understand the legal nature of NFT applications and the regulatory ideas based on this, and on the other hand, we hope that this framework will inspire people to think about the legal characteristics and regulatory ideas of NFT applications, and jointly explore the compliance operations of NFT application development, because this is the foundation and key to the application of NFT technology and industrial development.

1. NFT applications provide a new service experience

Let's first look at the more successful NFT applications. These applications are all based on digital products without exception; they optimize a certain experience; their content and value are either directly related to the off-chain or purely on-chain digital products. In the future, there may be more successful applications and more good experiences, which may require us to constantly summarize and explore.

1. NBA TOP SHOT

NBA TOP SHOT is an NBA player collection card platform blockchain application built on the Flow blockchain by the National Basketball Association (NBA) in cooperation with Dapper Labs. This card is a unique NFT product made of short videos of a player's career highlights such as three-pointers, slam dunks, assists, etc., with game information, rarity, recent sales records, etc. for players to buy, sell, and display. NBA TOP SHOT divides it into several categories according to its rarity: "common", "rare" and "legend".

Perhaps because of the existing market foundation of NBA star cards in the United States, NBA TOP SHOT products have been very popular after their launch and have ranked among the top in total sales in the NFT field. Five months after the launch of the public beta version, it has more than 800,000 registered accounts, processed more than 3 million transactions, and achieved sales of $460 million in the secondary market. On February 23, 2021, LeBron James' "Legendary Moment" in the Cosmic Series 1 Set was sold for $208,000, which is the highest purchase price for NBA TOP SHOT collectibles to date.

What role does NBA TOP SHOT play in optimizing the star card trading experience? In the past, the NBA might charge royalties on the initial sale of physical cards, but it would not increase revenue from secondary transactions. Through the ownership, programmability, uniqueness, and scarcity characteristics determined by NBA TOP SHOT, the NBA and the Players Association can obtain commissions on both the first and second transactions. The specific implementation method is that Dapper Labs will charge a 5% fee on each transaction, and these proceeds will be distributed to the NBA and the National Basketball Players Association. According to official website data, Dapper Labs has contributed $49 million to the NBA and the Players Association to date.

NBA TOP SHOT has completely transformed the traditional fan economy and reestablished connections with fans, which not only brings economic value to ordinary fans, but also reflects fan loyalty and participation. In the past 3 million transactions, 1 million transactions were between $10 and $50; in addition, 90% of NFT transactions with six-digit prices were not resold but used for collection.

2. Sorare

Sorare is a global fantasy football game released in 2019 based on the ERC721 protocol, allowing users to buy, sell and manage virtual football teams using digital player cards. To become a football manager on Sorare, users first register their team and claim 10 regular player cards. A starting lineup of 5 can then be formed, and points are won based on the players' performance in actual football matches. Users can also participate in various competitions and receive ETH rewards. Sorare has gained wide popularity due to official licenses from teams such as Real Madrid, Bayern Munich, Liverpool, etc.

What convenience does Sorare bring to players? Sorare card owners can verify the scarcity and ownership of their cards and transfer them freely. Each player card displays several attributes, such as rarity, average score, and experience points. Player cards in Sorare include three types of scarcity: rare, super rare, and unique. Each player card has one unique version, 10 super rare copies, and 100 rare copies.

3. SuperRare

SuperRare is a digital art marketplace founded by John Crain in 2017 based on the ERC721 protocol, where artists can convert their real single-edition artworks into collectible digital works. SuperRare's historical transaction volume and traded digital products have made it a major art NFT platform.

What convenience does SuperRare bring to artists? Artists can issue authenticated digital artworks on SuperRare and be certified on the Ethereum blockchain to prevent forgery and provide historical provenance. Artists can use virtual reality galleries and digital displays to display their works in SuperRare. On the other hand, art collectors can buy artworks on SuperRare and then resell NFTs on secondary markets such as OpenSea. All transactions on SuperRare are conducted through ETH, and buyers need to pay a 3% transaction fee for all purchases. Similar to traditional art galleries, SuperRare also charges commissions to artists. For a single sale, the artist receives 85% of the revenue, while SuperRare retains 15%. For secondary sales, the artist will receive a 10% royalty. SuperRare describes itself as a combination of Instagram and Christie's.

4. CryptoKitties

CryptoKitties is the first mainstream application of NFT. CryptoKitties is a game developed based on the Ethereum ERC721 protocol that allows users to collect and breed virtual cats. Each token represents a unique digital cat on the blockchain. These digital cats vary in appearance and characteristics and cannot be copied, destroyed or taken away. CryptoKitties is the first NFT protocol to attract mainstream attention in late 2017. The game attracted great attention because users can breed rare digital cats and resell new Kitties for profit. Although the "golden time" of CryptoKitties has passed, the game has established its iconic status in the NFT field.

CryptoKitties brings players an unprecedented user experience. To start breeding digital cats, users need to deposit ETH in the game's official wallet Dapper. There are two ways to breed new kittens: breeding two of your own kittens or breeding with a male sire (i.e., father). Users can get their first kitten by purchasing items on the market or bidding for a kitten in the game's "offer" system. Experienced CryptoKitties players are committed to collecting as many valuable digital cats as possible. The value of each kitten depends on its rarity. "Generation 0" is the rarest kitten, with a fixed supply of 50,000. This makes Generation 0 kittens scarce, and their value increases over time. In addition, kittens with low ID numbers are also considered rare kittens, including Exclusive cats or Founder cats, which can all be traded at higher prices on the CryptoKitties market.

5. CryptoPunks

CryptoPunks. CryptoPunks are one of the earliest NFTs and consist of 10,000 unique characters or "punks". Each punk is owned by one person and ownership is recorded on the Ethereum blockchain. The punks were given away for free during the initial release period and were quickly claimed and traded on the market. Owned by over 333,000 collectors. Users can buy and sell punks on markets such as OpenSea by installing the MetaMask Ethereum wallet. NFT data provider Cryptoslam revealed that CryptoPunks ranked 16th in the top 18 crypto collectibles sales, and CryptoPunk 7804 set the highest collector's price to date at 4,200 ETH ($7.8 million at the time of purchase).

CryptoPunks is also an experience that has never been seen before. The rarity of a punk is based on its type, attributes, and accessories. For example, male and female are the most common punks, while there are only nine alien punks. In addition, each punk has unique accessories, such as hats, glasses, etc. The value of each punk also depends on the number of accessories it has. Generally, two or three accessories are the most common, while the rarest punks have zero or seven accessories.

6. Rarible

Rarible is a marketplace for digital collectibles. Rarible is an NFT marketplace created in January 2020 by Alexander Salnikov and Alexei Falin. Rarible has gained widespread popularity in the crypto community thanks to its governance token, RARI. While the recent hype about governance tokens stems from the DeFi space, Rarible is the first NFT protocol to release its own governance token. The launch of RARI is the first step towards Rarible’s ultimate goal: the creation of the Rarible Decentralized Autonomous Organization. As holders of RARI, users can submit and vote on system upgrade proposals, including decisions regarding Rarible transaction fees and new features.

Rarible can provide a brand new service for content creators and artists to distribute their own works. Rarible allows users to mint, buy and sell various digital collectibles and products of their rarity, including digital art, domain names, DeFi insurance policies, memes, and metaverse. The minting of digital collectibles in Rarible is relatively simple. Users can first upload the collectible in any supported digital form (graphics, audio, etc.), and then add descriptions and pricing details. After that, users need to connect with their Ethereum wallet to approve the minting transaction. The NFT minting feature attracts content creators and artists, who can release trailers of their content and only provide the full version to users after the relevant NFT is purchased.

(7) Ethereum Name Services

Ethereum Name Services (ENS) is the leading domain name NFT. Founded by the Ethereum Foundation in May 2017, Ethereum Name Service is a distributed and scalable naming system based on the Ethereum blockchain. The protocol has more than 190,000 registered names and has integrated more than 100 wallets and decentralized applications to date.

NFT provides a decentralized domain name trading service. The local TLD (i.e. top-level domain) is ".ETH" on ENS. These ".ETH" domains are unique and non-fungible, represented by ERC-721-compliant NFTs, and can be purchased and traded on NFT markets such as OpenSea and Rarible, which can be seamlessly plugged into NFT market and wallet interfaces to enhance the integration of NFT and DeFi. According to OpenSea, the Ethereum Name Service is the leading NFT in the field, with a historical trading volume of more than 7,119 ETH (US$12 million) and more than 31,000 owners.

2. NFT application service experience stems from the unique technical application characteristics of NFT products

Technically speaking, NFT (Non-Fungible Token) is a token with a specific ID issued based on blockchain NFT technology protocols such as Ethereum's ERC721 protocol and ERC1155 protocol. The ID can be attached with corresponding metadata. Since these metadata can point to a specific online or offline digital product, NFT can be used to represent a specific digital product, so it is called NFT digital product or NFT product. In contrast, FT (Fungible Token) is a homogenous token. It is generally believed that FT is not associated with a specific digital product and is usually used to represent a certain equity certificate.

1. Issuance based on blockchain makes digital products open, transparent and verifiable

NFT is issued based on blockchain technology protocols. NFT is issued based on blockchain networks and can represent collectibles and other specific digital products in the digital age due to its distributed accounting, non-replicability, programmability, indivisibility, non-substitution, uniqueness and scarcity. The value of NFT is based on the verifiable digital ownership proof of blockchain, which can realize the value flow of different ecosystems.

2. Based on information specificity, digital products are made proprietary, scarce, and unique.

NFT can make information specific and form digital products. NFT with a specific ID can attach metadata, which can point to a specific digital product, and the digital product does not need to be anchored to a specific offline physical product. Developers can make specific attributes unchanged over time by programming contract code on the chain. Metadata is particularly important for artworks or game props, because the value of artworks depends largely on the provable scarcity of the original work.

NFT can provide proof of ownership of digital products. NFT provides users with ownership and license management. NFT specifies digital products and clarifies the owner's address, and can program and design product attributes to achieve interactive operations between different programs. Based on this, NFT can become a unique digital product with a clear owner, rich information, exclusivity, and tradability. It can be said that the NFT technology protocol has become a tool for the confirmation of ownership of digital products.

NFT can increase transaction value because it can confirm ownership. With NFT, the way to own digital media assets becomes exactly the same as the way to own digital financial assets. The tradable value of NFT ownership is reflected in its transferability. It can be resold to almost anyone in the world, which means it has a wider pool of potential buyers.

NFT can confirm the uniqueness and verifiability of digital products . Once a work is generated as an NFT and recorded on the blockchain, it is unique and cannot be copied. And based on the transparency of blockchain technology, people can also verify the authenticity of NFT at any time. Although we can also view "Horse Picture" on the Internet, it is not the same as owning it. Just like Bitcoin, although you may not need a real physical coin to "prove" the existence of Bitcoin, you at least need a wallet that can store Bitcoin to "prove" your ownership of the assets you hold.

NFT can confirm the scarcity of digital products . Many NFTs are unique or limited, and even the creator cannot copy them. For example, NBA TOP SHOT's digital basketball card, many fans hope to be able to collect such a star card that cannot be tampered with and will not be damaged. The high sales of NBA TOP SHOT also proves that the scarcity value of NFTs issued based on strong IP is recognized.

3. Digital products are given value based on programmability and designability

NFT is programmable and designable for the properties of digital products. Based on the specific data information and equity characteristics in the application scenario requirements of NFT, NFT can design more complex mechanisms through smart contracts, including forging, production process, exchange/redemption, random generation, etc. A very interesting example is that CryptoKitties directly integrates the breeding mechanism into the CryptoKitties contract.

NFTs can grant rights and interests related to digital products. Some NFTs use physical items and personal rewards to increase the attractiveness of NFT transactions. Shortly after the end of his NCAA basketball career, Luka Garza, a top American college men's basketball player, launched an NFT that came with a series of physical rewards: the autographed shoes that Garza wore when he broke the University of Iowa's scoring record in the game on February 22; a private meditation with Garza; dinner with Garza, watching movies with Garza, and playing games with Garza; and a lifetime VIP pass to any basketball training camp held by Garza.

NFT digital products are subjective. The different qualities of NFTs come from their different metadata, but these differences may be ignored due to subjective transaction needs, which is also in line with the logic that value comes from consensus. From a purely technical perspective, the data of each FT, including Bitcoin, is not completely consistent, but this inconsistency has no impact on transaction needs.

4. New digital products bring a new experience

The above-mentioned digital product applications based on NFT technology have brought a brand new experience to users. NFT trading cards are usually the most common application carriers of NFT products. They can be created based on different blockchain networks, and their metadata such as images can be stored, viewed and transmitted through wallets that support NFT. NFT trading cards can be given immutability and public verification of ownership, and exist based on blockchain. Many platforms provide NFT creation, purchase and sale services. For example, some of the largest trading platforms currently include OpenSea, SuperRare, etc. Based on specific basic information, usage information, and transaction information similar to NFT trading cards, NFT products can realize cross-ecological value flow and meet the transaction needs of different participants.

We believe that the development process of the digital economy is a process of industrial digitization, digital industrialization and governance digitization. It is accompanied by asset digitization, digital assetization, commodity digitization, financial digitization and currency digitization. From the current regulatory framework of countries around the world, cryptocurrencies generally have several characteristics, namely currency attributes, commodity attributes and securities attributes. These attributes are reflected in different types of cryptocurrencies, and sometimes even in different development stages and different application scenarios of the same cryptocurrency. Yao Qian, the first director of the Digital Currency Research Institute of the People's Bank of China, pointed out that in the future, digital assets are assets with full information and full data, and their underlying assets and financial asset attributes are gradually integrated into one, and are gradually no longer separated from traditional financial assets and underlying assets. NFT products are mainly digital products and digital commodities, but they also have good liquidity. NFT applications to a certain extent reflect the beneficial exploration of industrial digitization and commodity digitization.

3. Comparative Analysis of the Legal Nature of NFT Products

From the above analysis, we can see that NFT products are collectibles or other specific digital products in the digital age issued based on the blockchain network, due to their distributed accounting, non-replicability, programmability, indivisibility, non-substitutability, uniqueness and scarcity. NFT has many unique attributes compared to other tokens. In order to better understand the specific connotation of NFT, we might as well compare NFT and NFT products with related concepts. Through these framework comparisons, we may find that the basic characteristics and attributes of NFT products may be reflected in many different rights or products, but it is difficult to completely classify them into a specific traditional right or type of rights, and even to some extent, it is difficult to completely classify them into the traditional existing legal attribute framework for regulation.

NFT and FT. NFT is Non Fungible Token, while FT is Fungible Token. Compared with FT, the token generated by NFT has a unique ID and attached specific metadata, while FT usually has no unique ID and metadata and is only used as a bookkeeping symbol. For example, each Bitcoin has its own transaction history, such as the Bitcoin from the Genesis Block. If the trader cherishes this particularity, then the Bitcoin can also be regarded as NFT. But ordinary traders do not care about this, so Bitcoin is generally regarded as FT.

NFT products and currencies. Modern countries, including China, generally stipulate that legal tender is used to pay all public and private debts within their borders. Because NFTs are issued based on blockchain, in practice they are generally traded through homogeneous tokens FT based on the same blockchain, such as most NFTs developed based on the Ethereum network are traded through ETH. There are also some NFTs issued based on consortium chains that support trading through legal tender.

NFT products and securities . Securities are a general term for a variety of economic rights certificates, and also refer to special types of products. They are legal certificates used to prove that the holder of the ticket enjoys a certain specific right. Securities mainly include capital securities, monetary securities and commodity securities. Securities in a narrow sense mainly refer to securities products in the securities market, including property market products such as stocks, debt market products such as bonds, and derivative market products such as stock futures, options, interest rate futures, etc. Generally, when we mention securities, we usually refer to securities products in the securities market in a narrow sense. Securities are essentially financial products. Countries have strict regulations on what securities are and how to judge securities. The application and development of blockchain technology has posed challenges to securities supervision in countries around the world. At present, the US SEC believes that Bitcoin and Ethereum are not considered securities because of their high degree of decentralization.

According to the newly revised "Securities Law of the People's Republic of China" in 2019, within the territory of the People's Republic of China, the issuance and trading of stocks, corporate bonds, depositary receipts and other securities recognized by the State Council in accordance with the law; the listing and trading of government bonds and securities investment fund shares, as well as the issuance and trading of asset-backed securities and asset management products shall be prescribed by the State Council in accordance with the principles of this law.

According to the characteristics of specific digital products possessed by NFT, it belongs to securities in a broad sense, that is, it represents a specific commodity, rather than a security certificate with a certain future income cash flow.

NFT products and commodities. NFT is issued based on blockchain, is unique and non-replicable, and can point to the owner, which is very suitable for making game props, digital artworks, tickets, etc. NFT products. Therefore, NFT is a blockchain tool for digital products or digital commodities. Although NFT can anchor commodity data information outside the network, it is mainly a digital product. As more and more physical commodities are digitized, the application space of NFT will likely become larger and larger.

NFT products and digital assets. The specific connotation of digital assets has been repeatedly discussed since the development of blockchain technology applications, but there is still no consensus. Some believe that "digital assets are programmable assets in the form of electronic data", while others believe that "when digital resources are published on the Internet through blockchain, they will be confirmed, and digital resources will become trusted digital assets on the blockchain, which can be used for circulation and transactions." Yao Qian, the first director of the Digital Currency Research Institute of the People's Bank of China, believes that "digital assets in the true sense should be native, contain full information, and are displayed and circulated in digital form."

NFT products have all the attributes of digital assets . Digital assets are programmable assets that exist in digital form. They include the digitization of traditional assets and new programmable digital assets, and these two characteristics are intertwined. Generally speaking, there are two categories. One is the digitization of traditional physical assets and equity assets. Physical assets or equity assets such as property rights, equity, debt, other property rights and copyrights may gradually become digital assets. The second is programmable digital assets. With the in-depth development and integration of industrialization and financial innovation, the uniform specifications of industrial products produced in the industrial era can no longer meet the needs. People hope to obtain more personalized services suitable for themselves and digital assets that are digitally designed and programmable.

NFT products provide a way to confirm the ownership of digital products based on the independence, interoperability, openness and transparency of blockchain information confirmation, as well as the characteristics of specific data information. Since the development of the Internet, various digital assets have been traded and consumed through the Internet, including some irreplaceable digital assets such as domain names, event tickets, in-game items, and even speeches, likes, and reposts on social networks such as Twitter or Facebook. These may all become NFT products.

NFT products and creditor's rights. Creditor's rights refer to the rights of the right holder in the debt relationship to require the obligor to perform or not perform certain actions. NFT can point to a specific owner and a specific digital product, but does not constitute a legal rights relationship between the two entities. In the legal sense, it is a right of possession, control and disposal, so the NFT holder does not have a creditor's right.

NFT products and intellectual property rights. Currently, most NFT products only provide proof of ownership, and what is traded is the ownership of the "original" work. Famous NFT platforms, including SuperRare, have made it clear that the NFTs they trade do not include the intellectual property rights related to the work. However, in theory, under the conditions that technology can support, the programmable and designable characteristics of the contract can be used to realize the transaction of intellectual property rights through NFT, such as limiting the playback time, playback method, playback environment and even playback objects through technical means.

How do NFT products protect copyright? Due to the lack of clear legal constraints, the existing technology of NFT cannot fully guarantee that the copyright of the creator is respected. For example, no one can prevent the first-hand seller from placing the same NFT on different blockchains for repeated sales. On the other hand, although NFT technology can ensure that no one can copy or transfer NFTs without the holder's permission, it is impossible to control who is the first person to make a work into an NFT. For example, Swedish illustrator Simon Stålenhag, who did not issue NFT works himself or authorize anyone, found that one of his works became a "MarbleCard" (a type of NFT). The current NFT is extremely lacking in supervision, which makes creators feel that their copyright is not respected.

Under decentralized conditions, the rights and interests of copyright owners face new challenges. One of the ways blockchain can solve copyright issues is to operate collective rights management based on the community-based operation characteristics of blockchain. Individual copyright owners may face problems such as lack of transparency, time lags in paying royalties/authorizations, abuse of monopoly status and inefficiency when using collective management organizations (CMOs), but it is possible to fix and trade such personal copyright rights in the form of NFT digital products.

NFT products and data rights. As a digital product, NFT's own attributes and value are also established and described based on data, including its ID issued in the form of a contract, and the storage of its metadata also has important data rights. Whether the metadata is stored on the creator's own server or hosted on a decentralized storage system, technical means must pay special attention to protecting the mapping relationship between the NFT's ID and metadata, and metadata and objectively existing specific products, which is directly related to the use and transaction of NFT products.

NFT products and virtual property rights. Article 127 of the Civil Code of the People's Republic of China stipulates: "Where the law has provisions for the protection of data and network virtual property, such provisions shall be followed." Previously, the Legal Affairs Committee of the National People's Congress said in interpreting this provision of the original General Principles of the Civil Law that it is necessary for the General Principles of the Civil Law to make provisions for new civil rights objects such as data and network virtual property. However, given the complexity of data and network virtual property, and limited by the chapter structure of the General Principles of the Civil Law, how to define data and network virtual property, and how to specifically stipulate the rights attributes and rights content of data and network virtual property, is difficult and controversial.

Although there are some disputes over the definition of virtual property, the consensus view is that game props as virtual property are the carriers of the content of online game service contracts, but they have certain protectability under the control of players. Considering the nature and characteristics of NFT products, NFT product holders have strong dominance and control over NFT products, and the fact that NFT products are virtual property that should be protected by law is indisputable.

NFT products and property rights. In general, the property rights of NFT products include the following features: first, based on the design of the content of the rights, the benefits of using digital assets can be expanded; second, based on decentralized distributed accounting, transaction records cannot be tampered with; third, based on decentralized smart contracts, rights can be confirmed and automatically executed.

Unlike FT, NFT can easily issue tokens with specific numbers and add descriptive metadata to the tokens. Developers can programmatically enforce that only a specific number of specific rare items can be created, and can also enforce that specific properties do not change over time by encoding on the chain to maintain the stability and permanence of the properties of digital items. Based on the above characteristics, NFT enables digital assets to obtain rights similar to property rights.

The use of NFT is essentially still the use and consumption of objects related to the digital content it specifies, and the connotation of "objects" is expanded due to its digital form. NFT products may specify property rights that are difficult to specify under the original non-digital asset conditions, or that can be specified but costly, greatly enriching the connotation of assets and greatly improving transaction convenience. For NFT, its target is directly pointing to a certain digital product, whether the product is online or offline, which can be designed and specified by artificial programming language and can be conveniently executed.

As for the legal protection of NFT products, before creating new types of rights to protect them, only property rights protection is most suitable for the characteristics of their rights. In the existing property rights legal system, in addition to property rights, creditor's rights, intellectual property rights, inheritance rights, equity and other investment rights, and even the legal protection of data and virtual property, cannot provide targeted and effective protection for digital assets, because other property rights except property rights are special provisions made based on the specific circumstances of the possession, use, disposal and income of property rights; and NFT is, in a sense, a non-traditional form of non-natural property, but a socialized form of object, and this socialization is reflected in the design, programmability, and intelligent transaction execution.

NFT products and cultural products. To apply for engaging in commercial Internet cultural activities, an application shall be submitted to the cultural administrative department of the people's government of the province, autonomous region or municipality directly under the central government where the applicant is located, and the application shall be reviewed and approved by the cultural administrative department of the people's government of the province, autonomous region or municipality directly under the central government. Internet cultural products refer to cultural products produced, disseminated and circulated through the Internet, mainly including: (i) Internet cultural products such as online music entertainment, online games, online performances (programs), online performances, online artworks, online animation, etc. produced specifically for the Internet; (ii) Internet cultural products that use certain technical means to produce and copy cultural products such as music entertainment, games, performances (programs), performances, artworks, animation, etc. and disseminate them on the Internet.

Activities that provide Internet cultural products and services mainly include: (1) the production, reproduction, importation, distribution, and broadcasting of Internet cultural products; (2) the online dissemination of cultural products by posting them on the Internet or sending them to computers, fixed telephones, mobile phones, televisions, game consoles and other user terminals, as well as Internet cafes and other Internet access service business premises through information networks such as the Internet and mobile communication networks, for users to browse, appreciate, use or download; and (3) exhibitions, competitions and other activities involving Internet cultural products.

Therefore, although NFT itself does not belong to the creation of Internet cultural products, it only provides a blockchain-based technical device for the product to indicate the owner and specific content. However, if it is to be consumed and traded, products under this regulatory framework should comply with corresponding regulations and obtain relevant qualifications and licenses.

IV. Legal Regulation of NFT Industry and Platform-related Issues

So what should we pay attention to in NFT products and industrial applications, and how to carry out legal regulation? Let's analyze it. On the one hand, we closely follow the market demand and application characteristics, and on the other hand, we rationally and objectively face some new risks and challenges faced by the development of the NFT industry. Through these holistic and framework thinking, we provide some prudent legal regulation suggestions. Of course, these suggestions need to be continuously improved and matured in combination with practice to form a new development model and regulatory model.

1. Basic issues of NFT industry application

NFT and industrial applications. The NFT industry refers to related industries that provide services such as issuance, trading and use of NFT digital products. The development process of the digital economy is also a process of digital assetization, asset digitization and governance digitization. NFT is a beneficial exploration of asset digitization. We have seen the combination of NFT with artworks, game props, content production, domain names and other fields. In the future, the combination of NFT and other industries may become a trend.

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(II) Issues related to NFT platform

The NFT platform should be a commodity transaction information aggregation platform. Based on the nature of NFT digital products, it must be clear that the platform is not an NFT transaction broker, nor a financial institution, credit institution, or a guarantee institution. The services provided by the company's platform are limited to promoting transactions between the buyer and the seller, and do not constitute any agreements about the cryptocurrency assets or users of the buyer and the seller, but are only used as an information aggregation platform. At the same time, an NFT minting service serving users may be provided, even if the process of applying smart contracts is more popular and simple.

As a website operator, ICP registration is required. Domain name registration is a website registration procedure, and there is no distinction between commercial and non-operating nature. As long as it is a website running in China, it must be registered. ICP registration can be completed by the server hosting provider where the website is located. The hosting provider submits the relevant data to the Communications Administration Bureau where the operator's server is located. The Communications Administration Bureau reviews and passes the data to the Ministry of Industry and Information Technology, and the Ministry of Industry and Information Technology issues a registration number.

As an Internet information service provider, you need to apply for an ICP license (Internet Information Service Business License) . The ICP license is issued by local communication management departments. The content of commercial ICP operations mainly includes online advertising, web page production, APP websites, paid information platform websites, game websites, etc. The state implements a license system for commercial ICPs. Operators must apply for an ICP license. ICP license is a license for website business. According to the provisions of the National "Internet Management Measures", commercial websites must apply for an ICP license, otherwise it is illegal.

As an e-commerce platform, an e-commerce platform operator refers to a legal person or non-legal organization that provides online business places, transaction matching, information release and other services to both parties or multiple parties in e-commerce for both parties or multiple parties to carry out transaction activities independently. This definition involves all aspects of the transaction, including transaction matching, information release, etc. Therefore, even if the issuing platform is only a platform for information release and aggregation, it may be recognized as a platform operator to a certain extent. Platform operators need to implement the obligations of subject review and information disclosure, especially the obligations of platform operators to verify and regularly update the identity and business license information of the operators on the platform. The rules of the platform agreement regarding entry and exit platform services, quality assurance of commodity services, promotion rules, consumer rights protection, consumer information protection, etc. should be paid attention to. Platform operators also need to fulfill their obligations to preserve commodity and service information and transaction information. The platform needs to list the list of prohibited restricted commodity information and prohibited restricted commodity information.

As a commercial Internet cultural activity platform, it should apply for review and approval from the cultural administrative department of the provincial government where it is located. Although NFT itself is not mainly the creation of Internet cultural products, it only provides the product with a blockchain-based technical device for indicating the owner and specific content, if consumption and transactions are to be carried out, products under the framework of this regulation should comply with the corresponding regulations and obtain relevant qualifications and licenses.

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As a blockchain application platform, you need to apply to the State Cyberspace Administration of China for registration of blockchain information services. Blockchain information service providers should fill in the name, service category, service form, application field, server address and other information of the service provider through the State Internet Information Office’s blockchain information service filing management system within ten working days from the date of service provision, and complete the registration procedures. The judicial blockchain application platform built by the Supreme People’s Court and the Guangdong-Hong Kong-Macao Greater Bay Area trade finance blockchain platform built by the People’s Bank of China are both blockchain platforms that provide related services to enterprises.

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Other relevant obligations of the platform. According to the specific business involved in the platform, the platform must also ensure user privacy, prompt the risks of blockchain technology application itself, and avoid platform transactions being used for illegal activities such as money laundering, clarify the relationship with copyright protection, and explain dispute resolution methods. If the platform itself does not retain user assets, such as assets are on-chain, third-party servers or decentralized storage systems, and do not retain user funds. User funds are all in their own blockchain-based wallets, then such businesses as the platform do not have financial attributes and professional management attributes.

NFT and alliance chain. Some alliance chains with the function of running smart contracts have broad consensus through co-construction of credibility nodes and have the technical basis for issuing NFTs on the chain. This is an embodiment of actively innovating application scenarios using blockchain technology.

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Platform user digital wallet. As early as 2001, the People's Bank of China made it clear in relevant regulations that cash cards can be used as electronic passbooks and electronic wallets without overdrawing. In 2008, the National Development and Reform Commission issued regulations to encourage telecom operators or content service providers with better basic conditions to widely use smart mobile terminals such as mobile phones, personal digital assistants and handheld computers to develop mobile e-commerce services. On the one hand, in the fields of public utilities, transportation and tourism, employment and housekeeping, leisure and entertainment, market conditions, and other fields, small payment and settlement services are carried out based on mobile wallets; on the other hand, mobile phone mobility and two-dimensional barcode, RFID, and various intelligent identification technology achievements, based on mobile automatic identity identification, information exchange, instant transaction, goods shipment and reception, mobile payment and other technologies and systems, to carry out various forms of automatic transaction services.

In the document on accelerating the development of strategic emerging industries in 2018, the Shenzhen Municipal People's Government proposed to accelerate the establishment of financial technology research institutions, break through key technologies such as digital currency wallets, smart contract verification and management, and intelligent analysis of financial big data. Focusing on key directions such as blockchain, smart finance, and financial risk management, strengthen the innovative application of financial technology, actively explore new technology application scenarios, and build a world-leading financial technology center.

Whether it is a consortium chain or a public chain, as long as the underlying basic chain with certain decentralized characteristics can run smart contracts, we can manage the blockchain assets generated on blockchain and smart contracts, whether it is UXTO or account model. Since there is no financing feature itself, and if it can ensure the stable metadata storage function and there is no fraud, we believe that there is no substantial legal obstacle.

NFT platforms and feasible operations and illegal operations. Regarding technical reliability supervision, blockchain applications are relatively technical and highly contagious, and they involve a wide range of communication, so they should have certain reliability requirements for their products. For example, the China Cybersecurity Law should comply with the requirements of national mandatory standards, which all belong to this type of concern. From the perspective of project operations, first, prevent transaction risks, data fraud, price manipulation, insider trading and technical risks; second, project promotion, whether infringes on investors' rights and interests, such as whether it is suspected of pyramid schemes; third, project publicity, business capabilities, functions, etc. cannot be exaggerated, and news is released with unrealistic slogans.

NFT platform and taxation. Blockchain NFT issuance and transactions should also comply with tax laws and cooperate with the tax department to make it easier for consumers to calculate taxes and avoid burdens. It is recommended to separate settlement and accounting and fulfill tax-related obligations.

NFT platforms cooperate with information protection and data security. Work with regulatory frameworks to give priority to privacy and protection of consumers. User information or financial data should not be collected or shared, unless it is to prevent fraud or criminal activity. In terms of data privacy, any data added to the blockchain will be subject to consistent control of the entire system. The draft Personal Information Protection Act and the draft Data Security Act under consideration stipulate that controller accountability and data minimization, data subject control, data portability rights, and design data protection. The draft Personal Information Protection Act requires controllers to be responsible for ensuring compliance with all privacy principles such as legality, fairness and transparency, purpose limitations, data minimization, accuracy, storage limitations, integrity and confidentiality. In addition, the draft requires every organization to prove that it complies with all principles.

The digital identity management solution provided on the blockchain is based on the return of control rights of users' personal data, and achieves established control goals through data. In the case of a licensed blockchain, users can use their own digital private key to download data and transfer from one digital identity management platform on the blockchain to another. Through decentralized identity technology based on alliance chains and access control technology for smart contracts, both guarantee supervision and protect user privacy.

NFT platforms and anti-fraud, anti-manipulation and anti-illegal use. We need to implement the real-name system of assets for easy supervision, because payments may be used in commodity and service transaction scenarios, or in financial transaction scenarios. In some financial or commodity and service transactions, users may often need to have certain qualifications or need to know their identity. For example, only real-name authentication can be used to transfer operations, such as real-name authentication, only digital tokens can be received. In this sense, DID plus real-name authentication is a blockchain infrastructure. Perform user real-name authentication and save relevant user information and transaction records.

NFT platforms and anti-money laundering and anti-terrorist financing. Implement safeguards to combat money laundering and terrorist financing activities. Any new efforts must comply with anti-money laundering rules and we do not mind competition. We want a level playing field. Perform user real-name verification, save relevant user information and transaction records, while avoiding disorderly prices of NFT products.

N FT platform and smart contract supervision. Smart contracts are reflected in code, while typical contracts are texts with legal significance. In the context of smart contracts, honesty and trustworthiness, contract performance and automatic execution, and breach of contract liability are embedded in code. It is recommended to establish and improve pre-examination, in-process supervision and post-processing mechanisms for smart contracts based on technical, legal and business perspectives.

NFT platform and cross-border supervision. Any wallet created based on blockchain network can interact with other wallets, provide network value, and will have its own wallet in some regions. Blockchain applications naturally have cross-border characteristics. Blockchain, as an information technology facility, is a tool and carrier for global communication. However, its users are located in different countries and regions, and different legal supervision must be applied. For example, the access to the Internet is similar to the governance of cyberspace. For China, capital projects are not yet fully open and the internationalization of the RMB is still in the process. How to prevent the impact of cross-border transactions is urgently needed. In particular, the nature of NFT encryption and point-to-point payments can bypass capital controls, weaken the effectiveness of cross-border fund supervision, and also aggravate the impact of cross-border capital flows. It is recommended to adopt different wallet and user qualification review standards for users in different jurisdictions, and establish a certain on-chain dispute resolution mechanism.

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NFT platform and asset securitization. Asset securitization is to issue securities based on the future income of a specific asset and sell it to investors. The original stakeholder of the asset transfers the future income of the specific asset to the holders of the securitized assets. Specifically for NFT and FT, we can think that each specific asset is an NFT, and the securities issued based on the specific asset are similar to FT. If the platform cannot operate all transaction cash flows on the entire chain, it should fully connect with traditional asset securitization operations; if all transaction cash flows can operate on the chain, we will strengthen communication with micro-regulatory agencies on the basis of ensuring security.

In short, NFT technology application and industrial development are coming, and the application scenarios and application experiences it brings are unprecedented. Perhaps it has ushered in a new era of digitalization of goods, industrial digitalization, and governance digitalization, but it is undeniable that the challenges and risks it brings are unprecedented. This article is a preliminary framework application and legal regulation thinking based on our thinking and summary of the application and legal regulation experience at home and abroad. There is still a lot of in-depth and meticulous work to be done. I hope that this article can inspire the rational thinking of the industry and regulators, so that we can continuously form consensus in communication and collision of ideas, which not only encourages innovative applications, encourages industrial development, but also protects the legitimate rights and interests of relevant users, industrial development interests and social public interests, explores an effective practical model, and strives to better promote the development of the digital economy and explore an effective digital governance model.