Compliant projects still have significant market potential
A couple of days ago, two seasoned practitioners with years of experience in China’s NFT digital collectibles industry visited Mankun Law Firm for discussions. They shared various remarkable stories from their experiences in the industry over the past two to three years and discussed many concerns held by platform operators and entrepreneurs. Many of these topics reflect the confusion faced by friends looking to start businesses in the NFT sector amid the current regulatory landscape.
With the aim of promoting positive development within the industry, and under the premise of anonymization, Mankun Law Firm has compiled the content of Attorney Liu Honglin’s discussions with these two friends into written form. We hope this provides some ideas or inspiration for entrepreneurs in related fields.
Current Status and Policies of the Domestic NFT Industry
First, there is widespread concern regardingwhether the state currently permits the operation of NFT digital collectibles.
Many entrepreneurs worry that their projects might be directly deemed illegal, or even face criminal risks. However, Attorney Honglin’s view is that, from a legal perspective, the state has not explicitly prohibited NFT digital collectibles. Neither two years ago nor today in 2024 has the state issued any policies restricting the development and sale of NFT digital collectibles, nor has any document denied their market value.
*Image source: Official website of the Xuhui District People's Government
On the contrary, some local governments have introduced supportive policies. Taking Shanghai as an example, support policies for blockchain enterprises have been successively released in the past two months. This indicates that while certain practices under the guise of NFTs are sensitive under domestic regulation, it does not mean there is no room for commercial survival. Commercial attempts integrated with industries and the digital economy are somewhat encouraged by policy. Of course, entrepreneurs should note that the NFT field is still in a relatively early stage, and the absence of specific regulations does not mean there are no risks.
The Relationship Between NFTs and Digital E-commerce
From Attorney Honglin’s personal perspective, I suggestentrepreneurs view NFT digital collectibles as a new generation of digital e-commerce.
Compared to directly discussing decentralization and true user ownership of assets, equating NFTs with cryptocurrencies can be somewhat abstract. For the general public and consumers, it is more reasonable to understand them as virtual goods. For instance, when you purchase an NFT digital collectible, whether its content is digital art or a virtual souvenir, it is essentially no different from purchasing a QQ skin or virtual props online. They are all transactions of virtual goods conducted through digital platforms.
Some friends may say that legislation for China’s NFT digital collectibles industry is imperfect and expect specialized legislation to regulate it in the future. I say this is unnecessary. The reason is simple: the current legal framework is quite comprehensive. All issues encountered in this industry are either addressed in the Civil Code or covered under the Criminal Law. Regulatory authorities are unlikely to enact specialized legislation specifically targeting NFT technology. The core legal focus remains on the trading and consumption behaviors of these products. Just as buying game skins does not encounter special legal issues, the same logic applies to purchasing NFTs.As entrepreneurs, you should view NFTs as part of internet e-commerce, rather than as a separate, special track. As long as operations strictly adhere to the standard norms of e-commerce platforms, such as consumer rights protection and advertising compliance, legal risks can be significantly reduced.
Trends in Legal Disputes: Increase in Civil Disputes
In recent years, disputes surrounding NFTs have indeed increased, especially cases involving infringement and consumer contract disputes. Previously, we discussed situations involving platform absconding and consumer fraud. However, with the exposure of more litigation cases involving NFT enterprises, you will find thatconsumer rights protection is gradually becoming the focal point. This indirectly proves that NFTs are being treated as a type of conventional virtual property, and the legal environment is gradually becoming standardized.
However, entrepreneurs must also realize that due to the virtual nature of NFTs, certain problems are indeed more likely to arise. For example, some platforms exploit the virtual attributes of NFTs for improper marketing or infringing activities. To avoid such legal disputes, enterprises must strengthen compliance construction during operations, particularly by strictly controlling platform transaction transparency, fund security, and user data protection.
Legal Risks of 'One-Yuan Purchase' and 'Battle Royale' Models
Within the industry, several popular models in previous stages, such as 'One-Yuan Purchase' or 'Battle Royale,' are viewed by us as typical high-risk business models. These practices are not inherently illegal, but they do easily cross certain legal red lines.
Many platforms use the 'One-Yuan Purchase' method to allow users to draw high-value NFT collectibles at extremely low prices. The risk increases significantly, especially when the platform involves two-way exchange between fiat currency and virtual property. For example, if users purchase platform chips with fiat currency, use these chips to draw NFT collectibles, and subsequently have the platform or cooperating third parties help users complete cash-out exchanges, improper platform operation can easily lead to criminal legal risks associated with operating a casino. Therefore, I recommend that when adopting these models, it is essential to assess risks from a legal compliance perspective to avoid falling into legal predicaments due to momentary negligence.
The Importance of Choosing a Company Registration Location
For current NFT digital collectibles entrepreneurs, choosing the company’s registration location is crucial. We have observed that in the past, many companies chose to register in places like Hainan and Chengdu to leverage policy dividends in those regions. However, as some local policies have gradually tightened, many enterprises have chosen to relocate. In contrast, cities like Shanghai, Shenzhen, and Hangzhou, due to the dense aggregation of internet enterprises and law enforcement agencies’ relative understanding of new technologies, offer policy and law enforcement environments more suitable for the implementation and development of NFT enterprises.
For instance, Shanghai’s blockchain policies are not only open, but local courts also have a higher level of understanding of blockchain technology, which is beneficial for entrepreneurs in resolving legal disputes. This difference in city selection determines that entrepreneurs will face different legal environments and policy support during their operations. Therefore, choosing an appropriate registration location can not only help companies mitigate the risks of policy changes but also facilitate better development opportunities for the enterprise.
Furthermore, maintaining good relationships with local regulatory authorities and avoiding unnecessary negative social impact is another point entrepreneurs must prioritize. We have seen many companies that, despite significant controversy online, have not faced administrative penalties or other adverse legal consequences as a result. This is often because these companies were able to communicate promptly with regulatory authorities, respond quickly to user complaints, and resolve issues through negotiation or settlement, thereby alleviating unnecessary burdens on regulatory authorities. Maintaining good interaction with regulatory authorities is very important. This not only aids the long-term development of the enterprise but also effectively reduces legal risks. For entrepreneurs, this is a long-term strategy; compliance awareness must be maintained throughout business operations to avoid crossing regulatory red lines.
Summary by Mankun Attorneys
NFT entrepreneurs do not lack opportunities under the current policy and legal environment. In fact, as long as compliance is prioritized, there remains significant market space. It is important not to be misled by the current market volatility, especially when operating platform models, where clear legal risk prevention awareness is required. We hope this article provides some inspiration for entrepreneurs in the NFT field. If you have further legal questions, please feel free to discuss them with us.
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*This article is an original work of Mankun Law Firm. It represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For reprinting or legal consultation, please add customer service contact: MankunLawFirm.
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