China is unlikely to tolerate speculative trading in non-fungible tokens (NFTs) even as the market is on a tear in the Middle Kingdom, a prolific state-backed developer of the tokens told Forkast in an exclusive interview. 

Government-founded Blockchain-based Service Network (BSN) helped over 300 Chinese companies issue NFTs through its infrastructure dedicated to the asset class. But speaking to Forkast, Red Date Technology chief executive officer Yifan He said he sees a bleak future for the industry.

Some NFTs “carry the characteristics of quasi-financial products” and there’s no way Chinese regulators will tolerate the speculative activity in the asset class, He opined.

He referred to the tokens as “digital collectibles,” a new moniker coined by Chinese issuers to get around the denouncement of the frenzy in the industry by state media. 

While some state-owned media outlets have issued warnings against the speculative nature of NFTs, some have issued what they call “digital collectibles,” a euphemism for NFTs.

No shade of gray

China has yet to set clear regulations on the trading of NFTs. 

That is despite the country witnessing a sprawling market for the emerging assets, with tech giants jumping on the bandwagon to issue and sell digital collectibles.

The NFT market ballooned to 150 million yuan (US$23.56 million) in 2021 with 4.56 million items issued, Shanghai-based think tank Suanli said in a recent report

See related article: BSN, China Mobile support local NFTs with new chain launch

If regulators don’t clamp down on reselling, the market could be valued at 29.8 billion yuan by 2026, according to estimates from Chinese brokerage Guosen Securities.

“If last year the market saw 150 million yuan in sales, then the number for this January might as well have surpassed that,” He told Forkast. Some NFT-trading platforms built with BSN’s technology might have already pocketed 40 million yuan to 50 million yuan so far this year, he estimated.

The Flippening

The billion-dollar question, then, is whether Chinese regulators will allow NFTs to change hands.

He doesn’t think so. 

“If everyone runs NFTs as ‘investment targets,’ then they can’t survive in China,” He said. “I can tell you now that if a government agency one day issues a notice [against digital collectibles], then the industry will disappear immediately.”

Industry associations are well aware of the potential risks. 

China’s banking and securities industry lobbies Wednesday urged members to “resolutely curb” the “financialization and securitization” wave of NFTs.

See related article: China’s industry lobbies join NFT bashing chorus

On Tuesday, the National Cultural Heritage Administration held a meeting on “digital collectibles” in Beijing. In the online symposium, the top government agency that oversees the development of museums urged caution when it came to selling NFTs of cultural relics.

Meanwhile, China’s tech giants, still smarting from Beijing’s rap, have started self-regulating themselves amid the regulatory uncertainty. 

Jack Ma-backed Ant Group imposed a 180-day lock-in for NFTs before a resale. But numerous platforms that don’t restrict users from immediately flipping NFTs continue to exist in China.

Don’t be an Icarus

More than 90% of the companies on BSN-DDC, a non-cryptocurrency NFT infrastructure the BSN launched in January, are engaged in businesses associated with “digital collectibles,” He estimated.

Despite all the buzz over NFTs in China, He suggested a pragmatic approach. 

He said he has been telling the platforms on the BSN infrastructure to always design their products as regular commodities without too many characteristics of financial products.

“You can’t design it as something similar to financial products that people can trade and sell when their value goes up,” He said. The approach of viewing NFTs as investments can easily make the companies selling them be viewed as trading exchanges, He explained. “This can be easily banned at the end of the day,” he said.

See related article: China museum chief fences cultural relics from NFTs

He reiterated a support for restrictions on the reselling of NFTs. 

“The concern is that we don’t know how frequent would be reasonable for an item to be traded as a commodity,” he said, referring to the gray zone that exists in China at the moment.

Some in the industry propose restricting the number of times an NFT is traded to six times a year, while others advocate limiting trading to once every other month or two, He said.

“I think the risks for digital collectibles remain high, although they’re really hot right now,” He said. “Other NFT applications are still in their infancy for me to jump to a conclusion.”

Ningwei Qin contributed to this report.