Written by: Liu Honglin, Mankiw LLP
A few days ago, two senior practitioners who have been working in the domestic NFT digital collection industry for many years came to Mankiw Law Firm to exchange ideas. They shared various magical stories they had experienced in this industry in the past two or three years, and also discussed many issues of concern to platforms and entrepreneurs. Many topics can represent the confusion faced by friends who want to start a business in the NFT field in the face of the current state of industry supervision.
In line with the idea of positive development in the industry, and on the premise of desensitization, Mankiw Law Firm compiled the content of the communication between attorney Liu Honglin and his two friends into text, hoping to provide some ideas or inspiration to entrepreneurs in related fields.
Current status and policies of the domestic NFT industry
First of all, everyone is generally worried about whether the country allows the creation of NFT digital collections at this stage?
Many entrepreneurs are worried that the projects they invest in will be directly deemed illegal, or even face criminal risks. However, Honglin's point of view is: from a legal perspective, the country has not explicitly banned NFT digital collections. Whether it was two years ago or today in 2024, the country has not issued any policies to restrict the development and sale of NFT digital collections, nor has there been any document denying its market value.
*Source: Xuhui District People's Government official website
On the contrary, some local governments have also introduced relevant support policies. Take Shanghai for example. In the past two months, support policies for blockchain companies have been released one after another. This shows that although some games under the name of NFT are sensitive to domestic supervision, they do not mean that there is no commercial survival space. Commercial attempts that combine with industries and digital economy are actually encouraged by policies. Of course, entrepreneurs need to pay attention that the NFT field is still in a relatively early stage after all, and the absence of supervision does not mean that there is no risk.
The relationship between NFT and digital e-commerce
From the personal perspective of Lawyer Honglin, I suggest that entrepreneurs regard NFT digital collections as a new generation of digital e-commerce.
Compared to directly talking about decentralization and the fact that assets truly belong to users, it is somewhat abstract to compare NFT with virtual currency. For the general public and consumers, it is more reasonable to understand it as a virtual commodity. For example, if you buy an NFT digital collection, whether its content itself is a digital artwork or a virtual souvenir, it is essentially the same as buying a set of QQ skins or virtual props online. They are all virtual commodity transactions conducted through digital platforms.
Some friends will say that China's NFT digital collection industry legislation is not perfect, and they hope that there will be special legislation to regulate it in the future. I said that this is not necessary, for a very simple reason. The current legal regulations are actually very complete. All the problems encountered by this industry are either stipulated in the Civil Code or in the Criminal Law. The regulatory authorities will not specifically legislate for the NFT technology. The core focus of the law is still the transaction and consumption of these products. Just as you will not encounter special legal problems when buying game skins, the same logic applies to buying NFTs. As an entrepreneur, NFT should be regarded as part of Internet e-commerce, not a special track that stands out separately. As long as the standard specifications of the e-commerce platform are strictly followed in operation, such as consumer rights protection and advertising compliance, legal risks can be greatly reduced.
Trends in legal disputes: Civil disputes on the rise
In recent years, disputes surrounding NFTs have indeed increased, especially cases of infringement and consumer contract disputes. In the past, we talked about cases of platform absconding and consumer fraud, but as more and more NFT-related lawsuits are exposed, you will find that consumer rights protection has gradually become the focus. This actually proves from the side that NFTs are being treated as a regular virtual property, and the legal environment is gradually being standardized.
However, entrepreneurs should also be aware that due to the virtual nature of NFT, some problems are indeed more likely to occur. For example, some platforms use the virtual attributes of NFT to conduct improper marketing and infringement. In order to avoid these legal disputes, companies must strengthen compliance construction during operations, especially strict control of platform transaction transparency, fund security and user data protection.
Legal risks of "one-yuan purchase" and battle royale mode
In the industry, there were several popular ways of playing such as "one dollar purchase" or "battle royale". From our perspective, this is a typical high-risk business model. These ways of playing are not inherently illegal, but they are indeed easy to cross some legal red lines.
Many platforms allow users to extract high-value NFT collections at extremely low prices through the one-yuan purchase method. Especially when the platform involves the two-way exchange of legal currency and virtual property, the risk will be greatly increased. For example, users use legal currency to purchase chips from the platform, and then use these chips to extract NFT collections. Later, the official or cooperating third party will help users complete the withdrawal and exchange. If the platform is not operated properly, it is easy to be suspected of criminal legal risks of opening a casino. Therefore, I suggest that when adopting these models, it is necessary to assess the risks from the perspective of legal compliance to avoid falling into legal difficulties due to momentary negligence.
The importance of choosing a place to register your company
For current NFT digital collection entrepreneurs, choosing the place of company registration is crucial. We can see that in the past, many companies chose to register their companies in Hainan, Chengdu and other places to take advantage of the policy dividends in these regions. However, as some local policies gradually tightened, many companies chose to relocate. On the contrary, cities like Shanghai, Shenzhen, and Hangzhou, due to the dense concentration of Internet companies and the relative understanding of new technologies by law enforcement agencies, local policies and law enforcement environments are more suitable for the development of NFT companies.
For example, Shanghai’s blockchain policy is not only open, but the local courts have a high level of understanding of blockchain technology, which is conducive to entrepreneurs resolving legal disputes. This difference in city selection determines that entrepreneurs will have different legal environments and policy support during their operations. Therefore, choosing a suitable registration location can not only help companies avoid the risk of policy changes, but also help companies obtain better development opportunities.
In addition, entrepreneurs must also pay attention to maintaining good relations with local regulatory authorities to avoid unnecessary negative social impacts. We have seen that many companies have not been subject to administrative penalties or other adverse legal consequences despite being controversial on the Internet. This is often because these companies are able to communicate with regulatory authorities in a timely manner, respond quickly to user complaints, and solve problems through negotiation or reconciliation, helping regulatory authorities to reduce unnecessary burdens. It is very important to maintain good interaction with regulatory authorities. This not only contributes to the long-term development of the company, but also effectively reduces legal risks. For entrepreneurs, this is a long-term strategy to always maintain compliance awareness during business operations and avoid touching regulatory red lines.
Attorney Mankiw's Summary
NFT entrepreneurs are not without opportunities under the current policy and legal environment. In fact, as long as they pay attention to compliance, there is still a large market space. It is important not to be confused by the current market impetuousness, especially when operating the platform model, you must have a clear legal prevention and control awareness. I hope this article can bring some inspiration to entrepreneurs in the NFT field. If you have further legal questions, please feel free to discuss.
