This article discusses: (a) an overview of the recent NFT landscape in Mainland China; and (b) the key issues to consider when issuing NFTs, launching an NFT platform, or providing NFT-related services in Hong Kong.

1. Introduction

First things first – what is a “non-fungible token”?

Currently, there is no legal definition of “non-fungible token” or “NFT” under Hong Kong laws. That said, the Financial Action Task Force (“FATF”)[1] describes an NFT (as is generally accepted in Hong Kong) as a digital asset, which:

  • is digitally linked to a tangible collectible (eg digital image, artwork, audio-visual file, video clip, avatar or gear of online games, animation, physical collectible, etc);
  • is recorded on a blockchain; and
  • is not intended to be used as a payment or investment instrument, or otherwise backed by any fiat value or asset.[2]

The recent policy statement[3] issued by the Government of the Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”) signals Hong Kong’s open and embracing attitude towards NFT-related businesses. The Hong Kong Government also recognises further opportunities can be realised on more use cases of virtual assets such as trading digital arts and collectibles.

With this clear vision and regulatory support taken by the Hong Kong Government, we observe a substantial increase in the number of Mainland China-based companies expanding their NFT platforms and other relevant NFT-related businesses into Hong Kong. Their business expansion includes operating an NFT platform out of, or marketing the platform in, Hong Kong. These NFT platforms typically offer the following key functionalities:

  • primary market: facilitating issuance of NFTs based on:
    • artwork (the creation of the artwork is done through cooperation with artists or IP right owners);
    • social digital content (eg digital image, audio-visual file, video clip, music, etc); and
    • in-game assets (eg virtual avatars, player headshots or other virtual items), which may be used in outside-the-platform virtual reality games; and
  • secondary market: (following the primary issuance) facilitating subsequent NFT sale and NFT transfer to other secondary NFT marketplaces operated in or outside Hong Kong.

The current regulatory position in Hong Kong is that, generally, where an NFT is a “genuine digital representation of a collectible”[4], the activities related to it do not fall within the existing regulatory remit under Hong Kong law.

This article discusses:

  • an overview of the recent NFT landscape in Mainland China; and
  • the key issues to consider when issuing NFTs, launching an NFT platform, or providing NFT-related services in Hong Kong.

2. An overview of the NFT landscape in Mainland China

2.1 General prohibition of “virtual currencies” in Mainland China

In order to understand the attitude and policies of the Mainland Chinese Government in virtual currencies, it is essential to examine the regulatory development over the past decade. Notably, the Mainland Chinese Government has displayed an increasingly restrictive attitude over time towards virtual currencies, as summarised in the timeline below.

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The restrictive approach taken by the Mainland Chinese Government reflects the general trend of heightened scrutiny over virtual currencies and their associated activities targeting residents in Mainland China. Importantly, the 2021 Notice superseded the earlier 2013 Notice and made clear that virtual currencies such as Bitcoin, Ethereum and Tether issued by non-monetary authorities, should not and cannot be circulated in the Mainland China market as currencies. Any virtual currency-related businesses are illegal financial businesses.

2.2 The ambiguity of the NFT landscape in Mainland China

Despite the stringent prohibition on virtual currencies in Mainland China, NFTs are not explicitly included in the category of “virtual currency” from the Mainland Chinese regulatory perspective. More often, NFTs are referred to as “digital collectibles” or “digital assets” rather than “tokens” in Mainland China to be distinguished from “virtual currencies” as banned under the current regulations in Mainland China.

Based on the premise that NFTs are purely vehicles that “carry” corresponding digital content (such as images, videos, audio, etc), there is a general understanding that NFT issuance and related activities do not explicitly fall within the scope of regulatory bans in Mainland China. However, the unique characteristics of NFTs (including their irreplaceable, indivisible, and tamper-proof nature) do not completely negate their nature as “tokens”. In the case where the NFT issuance and related activities have an impact on disrupting financial order, regulators in Mainland China may also take the view that such NFTs are “virtual currencies” or “virtual currency derivatives” and regulate them accordingly.

Consistent with the restrictive approach taken by the Mainland Chinese Government, the industry shares a similarly cautious view on NFT-related developments. On 13 April 2022, three industry self-regulatory associations, namely the National Internet Finance Association of China, the China Banking Association and the Securities Association of China, jointly issued the Initiative to Prevent Financial Risks related to NFTs, and pointed out that NFTs, as an innovative application of the blockchain technology, are subject to risks relating to speculation, money laundering and illegal financial activities. With this background, the industry self-regulatory associations proposed to prohibit activities such as:

  • the use of virtual currencies including Bitcoin, Ethereum and Tether as the pricing and settlement instruments for the issuance and trading of NFTs;
  • the division of ownership or bulk minting (ie to weaken the non-fungible characteristics of NFTs) in order to carry out initial coin offering (“ICO”) in disguise; and
  • the provision of services in relation to NFT transactions such as concentrated trade, continuous listed trading and trading under standardised contracts.

Also, it is noteworthy that if NFTs are minted in batches and methods such as “premium repurchase”, “appreciation commitment” or “speculation on circulation transactions” are employed, NFT purchasers may potentially recover their capital and may even profit from such NFT transactions as there is sufficient liquidity of the NFTs created in the market. In this case, the NFTs may be regarded as financing tools, and such NFT transactions may be characterised as “creating NFTs in batches to carry out ICO in a disguised form” and would then be subject to relevant financial laws and regulations.

Despite the absence of blanket prohibitions (like the ones on virtual currencies), we recommend adopting a cautious approach when designing the trading mechanism for NFTs (especially trading of NFTs in secondary market, which is currently prohibited in Mainland China).[5] This approach aligns with the general market understanding that NFTs are digital collectibles only, and any investment or speculative features (such as any scarcity or tradability of NFTs which may contribute to their perceived investment or financial values) should strictly observe other general regulations of investment activities in Mainland China, and not be encouraged.

With the evolving regulatory environment and uncertainty of the regulatory approach to NFTs and virtual currencies in the Mainland China market (in comparison with the embracing attitude for NFTs and virtual currencies in Hong Kong), we have observed recent increasing interests of Mainland China-based NFT operators in expanding their NFT-related businesses and operations to Hong Kong.

3. Key legal issues to consider when expanding China NFT platforms into Hong Kong

Despite the open and positive attitude towards NFT-related businesses from the local regulators in Hong Kong, any party interested in launching NFT platforms and related business in Hong Kong should pay attention to a range of legal and regulatory risks as summarised below.

Currently, there are no existing or pending NFT-specific laws or regulations in Hong Kong and therefore, NFTs are not regulated as a distinct asset class in Hong Kong. In other words, whether an NFT (and the relevant NFT platform) are regulated in Hong Kong largely depends on whether the offering of the NFTs and the platform functionalities triggers any existing licensing / regulatory regimes under Hong Kong law.

We summarise below the frequently asked questions relating to NFTs, and the key legal issues that you should take into consideration when issuing NFTs, launching an NFT platform, or providing NFT-related services in Hong Kong.

The summary is only intended to cover some of the key issues to consider for NFT-related businesses. It is not intended to cover all of the legal or regulatory issues that may be involved in, or risks that may arise from, an issuance of NFTs, a launch of an NFT platform, and the provision of NFT-related services in Hong Kong. It is also important to consider the commercial and practical aspects of the NFT-related business (eg whether the NFT platform operator / content contributors are entitled to “royalties”, etc).