Lawyer: The three associations issued several legal interpretations of the "Initiative on Preventing NFT-related Financial Risks"

What can't be NFT? What are the legal steps for NFTs? Where does a lawyer's legal review work? Where is the legal margin of NFTs? Lawyers in the industry interpret the "Initiative on Preventing Financial Risks Related to NFTs" from the perspective of legal practice.

Although some people say that everything can be NFT (Non-Fungible Token, non-fungible token), that is everyone's pursuit of emerging industries. For us legal workers, what may be more important is what can't be NFT? What are the legal steps for NFTs? Where does a lawyer's legal review work? Where is the legal margin of NFTs?

On April 13, 2022, the China Internet Finance Association, the China Banking Association, and the China Securities Association jointly proposed to jointly release the "Initiative on Preventing Financial Risks Related to NFTs" ("NFT Initiative").

So as a legal practitioner, how should we understand the "NFT Initiative" from the perspective of legal practice?

Which industry can NFT?

At present, domestic NFT is limited to the art industry, that is to say, the use of NFT to digitize the art industry, so that digital collections have changed art communication and will shine.

The dissemination of works of art has always determined its longevity and expressiveness by the materials it carries. From the ancient jade, stone, glass, silk, until the appearance of cloth, and finally the appearance of paper, works of art have been brilliant. However, after the appearance of paper products, it was also limited by the scope of private collections and museum collections, and it was not well known. Until today, with the advent of the Internet, you can browse these artistic treasures at any time at home. We can see museums around the world through the Internet, galleries around the world through the Internet, and the public account of Rongbaozhai in China to see their collections. If you have a favorite work, you can also buy it at any time.

With the development of the Metaverse, artists can also enjoy the development of the Internet industry to develop the commercial value of their artworks. NFT is one of the more popular methods at present.

The "NFT Initiative" draws a boundary for NFT

The positive orientation of the "NFT Initiative" is to standardize the application of blockchain technology and give full play to the role of NFT in promoting industrial digitization and digital industry. role in chemistry. Ensure that the value of NFT products is fully supported, guide consumers to consume rationally, and prevent inflated prices from deviating from the basic law of value. Protect the intellectual property rights of underlying commodities and support genuine digital cultural and creative works. True, accurate and complete disclosure of NFT product information to protect consumers' right to know, right to choose, and right to fair trade.

The purpose of the "NFT Initiative"

As the NFT market continues to heat up. In particular, the impact of foreign markets, the domestic market is just around the corner. As an innovative application of blockchain technology, NFT has shown certain potential value in enriching the digital economy model and promoting the development of the cultural and creative industry, but at the same time, there are hidden risks such as speculation, money laundering, and illegal financial activities.

It can be seen from the final destination of the above initiative that it is to prevent and eliminate the risks of speculation, money laundering, and illegal financial activities in NFT. Therefore, this initiative is a high-voltage line for the development of NFT. From its value expression—hype is not allowed; from its hidden function—money laundering; from its extensive fundraising property—it cannot be illegally raised , once the above-mentioned high-voltage lines are touched, the illegal acts will be dealt with directly.

About the three major publishing departments of the "NFT Initiative"

China Internet Finance Association, China Banking Association, and China Securities Association jointly called on member units to jointly produce the initiative "NFT Initiative". The functions of the three associations that issued the above-mentioned "NFT Initiative" can be seen, the initiative's comprehensive restrictions on the development of NFT financial attributes.

Although the above-mentioned associations are not functional departments, they do not have the right to issue laws, regulations, and normative documents, but the basis for their issuance of proposals is the People's Bank of China and the Central Cyberspace Administration of China on September 15, 2021. , the China Securities Regulatory Commission and other ten departments issued the "Notice on Further Preventing and Disposing of Hype Risks in Virtual Currency Trading" (Yin Fa [2021] No. 237) (hereinafter referred to as Document No. 237).

According to Document No. 237, as long as it is a virtual currency transaction with financial attributes, it is illegal. This is specifically reflected in the second paragraph of Article 1 of Circular 237: “To carry out legal currency and virtual currency exchange business, exchange business between virtual currencies, buy and sell virtual currency as a central counterparty, and provide information intermediary and pricing services for virtual currency transactions. , token issuance financing, virtual currency derivatives trading and other virtual currency-related business activities are suspected of illegal financial activities such as illegal sale of token tickets, unauthorized public issuance of securities, illegal futures business operations, and illegal fundraising. If the conduct of relevant illegal financial activities constitutes a crime, criminal responsibility shall be investigated according to law."

Therefore, as long as the NFT has the above possible behavior, there is an illegal behavior.

The "NFT Initiative" eliminates the tendency of financial securitization and the risk of illegal financial activities

Products designed by NFT, especially product descriptions, may require legal workers to explain in detail the product's Characteristics and legalization, that is, financial assets such as securities, insurance, credit, and precious metals are not included in the underlying commodities of NFT, and financial products are issued and traded in disguise.

NFT products do not weaken the non-homogeneous characteristics of NFT by dividing ownership or batch creation, and carry out token issuance financing (ICO) in disguise. The ICO (Initial Coin Offering) is equivalent to the IPO (Initial Public Offering) in the stock market. Although compared with IPOs, ICOs all raise funds by selling shares; all potential investors risk participation for potentially huge gains.

However, an IPO is an act of publicly issuing shares and raising funds on the basis of the registration or approval of the China Securities Regulatory Commission, the stock exchange, and professional opinions issued by other professional institutions. However, ICOs are not approved by any institution or department, and are only for the digital dissemination of their collections. It is forbidden to bypass the securitization product management department and conduct token issuance and financing in disguise. Violation of this clause will involve the crime of illegally raising funds or issuing stocks, companies, and corporate bonds without authorization.

The "NFT Initiative" prohibits the provision of centralized transactions and platforms for NFTs

Many NFT owners, whose purpose is to rapidly appreciate in the future. However, if there is no transaction, the appreciation of the product will not reflect the profit at all. Therefore, in order to prevent the hype of NFT, the "NFT Initiative" does not provide centralized transactions (centralized bidding, electronic matching, anonymous transactions, market makers, etc.), continuous listing transactions, standardized contract transactions and other services for NFT transactions, and illegally set up trading venues in disguise.

There is no transaction and securitization marketer services and platform services for the exchange, and it does not reflect the value-added attributes of its NFT. Violation of the above provisions may involve the crime of unauthorized establishment of financial institutions in my country's Criminal Law.

"NFT Initiative" NFT transactions are not denominated in virtual currency

It is forbidden to use Bitcoin, Ether, Tether and other virtual currencies are used as pricing and settlement tools for NFT issuance transactions. The initiative is fully implemented in accordance with the requirements of Circular 237.

"NFT Initiative" Real-name system for all NFT participants

"NFT Initiative" requires real-name authentication for NFT issuing, selling, and purchasing entities, and properly preserving customers Identity information and issuance transaction records, and actively cooperate with anti-money laundering work. Of course, the focus here is not to protect customer information, but to cooperate with the verification of financial crimes such as anti-money laundering.

The "NFT Initiative" requires members of the three major associations not to participate in investing in NFT

We note that China Internet Finance Association, China Banking Association, China Securities The member units of the three major associations of the industry association include Internet financial enterprises, quasi-financial enterprises, Internet banks and brick-and-mortar banks, securities companies, listed companies, etc., as well as foreign listed companies (including Hong Kong listed companies).

The "NFT Initiative" prohibits the members of the above-mentioned industry associations from directly or indirectly investing in NFT, and thus does not provide financing support for investing in NFT. But in reality, if there is such a company to buy NFT, there is no relevant penalty measures, the author believes that it should not be illegal.

Here we should note that the "NFT Initiative" was jointly produced by the three major industry associations and appealed to member units, and has no legal force. Whether or not the prohibited sexual behavior proposed by a specific initiative is ultimately illegal depends on the provisions of specific laws, regulations and normative documents.

source: Lawyer: The three associations issued several legal interpretations of the "Initiative on Preventing NFT-related Financial Risks"