Pacific Money

What’s Behind China’s Ban on NFTs?

Recent Features

Pacific Money | Economy | East Asia

What’s Behind China’s Ban on NFTs?

Chinese authorities have made it clear that they do not welcome financial elements of the new economy, including NFTs.

What’s Behind China’s Ban on NFTs?
Credit: Illustration by Catherine Putz.

NFTs in China appear to have gone the way of cryptocurrency already, with Beijing implementing rules that restrict participants from issuing or buying tokens based on securities, insurance, loans, and precious metals. Even NFTs based on other assets, such as art, are prohibited from resale and come with restrictions on gifting.

What does this mean for China’s new economy and its investors?

China is a big player in the new economy, which is centered on technological innovation. Authorities have underscored the need to build blockchain-based applications and information-based systems as well as automated processes in smart manufacturing and smart cities. Promotion of new technologies has been a major feature of China’s current development plan. But Chinese authorities have made it clear that they do not welcome financial elements of the new economy, including NFTs.

NFTs are non-fungible tokens, digital assets that represent unique or scarce objects such as art or music. They are exchanged online, with ownership recorded on the blockchain. They have often been purchased using cryptocurrency from NFT marketplaces. Recently, though, the decline in cryptocurrency markets has led to a sharp drop in the value of NFTs.

So is China’s stance on new finance astute or inadvisable? This is difficult to say. As China’s participation in NFTs grew, some observers criticized the government for requiring association through the blockchain service network, which requires individuals to upload their identities. This would allegedly allow the government to track contributors’ activities, giving the state greater means to observe its citizens.

However, after government-managed industry associations announced restrictions on NFTs and platforms turned to trading “digital collectibles” rather than asset tokens, this argument became moot. As it turns out, the state has viewed NFTs as a potential threat, possibly due to the presence of illegal or invisible financial activity in the country. China has struggled to tamp down underground banks, loan sharking, and shadow banking activities, and NFTs provide the public with a potential new channel for raising funds, legally or illegally.

China took a similar position on cryptocurrency, banning the use of Bitcoin and other virtual currencies. Cryptocurrency transactions and initial coin offerings (ICOs) have been banned, and large banks have been asked to crack down on cryptocurrency speculation. Crypto mining operations have been subject to crackdown and ban, with such operations moving out of their home provinces or even out of the country.

China’s stance on new finance may be rational. Indeed, it may be wise for China to sit out the volatility and irrationality pervasive in the cryptocurrency and NFT markets. The crash in the stablecoin market recently due to loss of value in the Terra Luna token has Western cryptocurrency investors jittery about the prospects of crypto, and the extremely high prices reached by NFTs sold by Beeple and XCopy are likely to decline somewhat over the long term. Indeed, declining crypto prices have already led to deflated NFT asset prices at present.

Of course, it is possible that in five or ten years, as cryptocurrency and NFT markets become more mature and better regulated, that China will miss out on gains to be had in each market. This may be yet another area in which Chinese citizens lack access to rising asset markets. Chinese households are restricted in buying overseas securities – they cannot directly purchase overseas stocks and bonds and must go through qualified investors in order to do so, making the process more complex and potentially more costly. There are also limitations on personal foreign exchange.

China’s financial markets remain underdeveloped, with risks pervading the corporate bond market and state intervention and/or promotion in the banking industry and stock market interrupting the trajectory of market forces. This underdevelopment gave rise to shadow banking in the first place, as citizens seek a reliable financial market in which to grow their funds. Such financial repression has also resulted in numerous real estate price bubbles, as investors bid for real estate due to lack of sufficient alternative investment outlets.

At present, we do not know what will happen in the cryptocurrency and NFT markets, but we do know that China will not participate. This means that China will miss out on both the worst and the best of these markets.