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NFTs in China: Owning a Sporting Moment

Cao Yu and Li Yi, of Haiwen & Partners, discuss the growth of NFT products that allow fans to share in the excitement of sports events.

Published on 31 March 2022
Cao Yu
Ranked in 1 department in Chambers Greater China Region 2022
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Li Yi

In recent years, non-fungible token (NFT) products have seen explosive growth in the sports world, as well as in the arts and other fields. Undoubtedly, part of the reason is that sports fans want to own a moment of a sports event, be it in the form of a slam-dunk video clip, a ticket to a game or as a mascot at an event.

The same need to share in this special excitement exists among sports fans in the PRC, as evidenced by news reports and products, as much as in the rest of the world. For instance, we have seen Olympic-themed Alibaba Cloud Digital Badge, digital images of highlight moments of Chinese Olympic champions offered by a major milk manufacturer, and the BingdunDun blind box NFT released on the nWayPlay platform during the Beijing Winter Olympic Games (although not available for users in the PRC).

The PRC Government's Position on NFTs and Blockchain Products

The PRC government has unequivocally announced its desire to embrace and support the blockchain-based economy. In particular, the General Administration of Sports issued a notice in 2020 calling for innovation by the utilisation of blockchain to encourage consumption in the country's sports industry. However, the PRC government attaches paramount importance to the security and stability of the country's financial system and has identified several aspects of NFT/blockchain products that should be considered risk factors requiring regulation.

The first aspect is NFT's functionality on the currency side (ie, its potential to be used as a cryptocurrency), which could affect the position of the legal Chinese currency, CNY (RMB, internally). Secondly, the issuance and trading of NFT shares would seem to mimic public offering and trading of shares, thus invoking the complexities of securities regulatory considerations. Thirdly, the government is vigilant about fraudulent fundraising in the name of cryptocurrency projects, including NFT projects, that may interrupt the good order of the financial market. The government has repeatedly expressed its prohibition through a series of regulations, at the ministerial level and above, against the usage of blockchain as a cryptocurrency or as a tool for illegal purposes.

In February 2022, the China Banking and Insurance Regulatory Commission issued a warning against use of the metaverse as a tool for illegal fund-raising. The notice highlighted how scammers and fraudsters are illegally raising money in the name of metaverse-related projects, such as blockchain games or real estate in the metaverse. In May 2021, the PRC banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and warned investors against speculative crypto-trading.

Market Practice and Regulatory Constraints of NFTs

During the past few years, major NFT platforms in the PRC have emerged over a very short period of time. Representative platforms include Topnod (launched by Alibaba's fintech affiliate, Ant Group), Huanhe (launched by Tencent), and NFTCN. Artistic works such as digital arts, music, photographs and paintings have been the most popular types since they first hit the market. It would not be surprising if sports-themed products subsequently grew rapidly over the platforms.

"NFTs in the PRC are often referred to as 'digital collectibles' rather than 'tokens' this is in order to disassociate them from cryptocurrencies, which are expressly banned by the authorities."

To deal with the risk factors discussed earlier, there are carefully designed safe-keeping measures relating to the creation, distribution and trading of NFT products.

To begin with, NFTs in the PRC are often referred to as digital collectibles rather than tokens is is in order to disassociate themselves from cryptocurrencies, which are expressly banned by the authorities.

Secondly, in general, access to the minting process is only by invitation from the platforms. In other words, it is not the case that anyone could mint NFT works on such platforms.

Thirdly, PRC NFT platforms are mostly based on a consortium chain built and controlled by major tech companies (eg, Alibaba, Tencent and JD). This is fundamentally different from the NFT market outside China, which is mostly based on the public chain and therefore more decentralised.

Fourthly, secondary trading is either closed or highly restricted in the PRC. For instance, Topnod requires owners to hold their NFTs for at least 180 days before they can transfer the same to another party, and such transferring would need to be free of monetary charge.

On top of the previously discussed technical measures, an NFT platform would also find that certain eligibility and formality requirements under existing PRC laws may apply.

Evolving Legal Issues in NFT Transactions

With the novel situation surrounding NFTs, market players should be mindful of the evolving legal issues in transactions. For instance, what are the actual rights that are being sold in NFT transactions? How do we find security in the chain of title relating to the minting process? What are the data protection and advertising compliance risks to watch out for? Novelty in the NFT sector, not surprisingly, creates a grey area, with questions to be further considered and analysed.

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