Non-fungible token mania has continued to gain steam in the U.S., as brands like Gucci have rolled out digital-only sneakers and artists like Beeple have set records by way of multi-million dollar auctioned-off artworks. All the while, the NFT craze – which sees blockchain-based tokens paired with often entirely digital assets, such as animations and online-only dresses – is starting to spread to China’s sweeping art market, the third largest in the world, according to a 2020 joint report from Art Basel and UBS, as digital art – including NFTs – is enjoying “an upsurge in Beijing,” according to the Financial Times.
While budding “NFT exuberance in China is just as real as it is everywhere else,” Yin Cao, Managing Director of the Digital Renaissance Foundation, a digital financial advisory agency based in Asia and Europe, recently told crypto publication Decrypt that it is “still too early” to expect a Chinese equivalent of the NFT explosion that is currently playing out in the West. This is true for two reasons, Cao says, namely, “the Chinese art market has an extremely poor understanding of crypto art, and Chinese NFT artists have a lot of catchup work to do compared to its western counterparts.”
Beyond these reasons, an NFT craze in China is likely to be complicated by an additional factor: the impact of Chinese regulations, which are particularly stringent when it comes to the crypto space. In recent years, the Chinese government has been exerting control over various crypto-related activities, with Beijing making headlines when it banned initial coin offerings (“ICOs”) almost 3 years ago. On the heels of an investigation into ICOs, the People’s Bank of China revealed in September 2017 that it would formally ban the crypto-centric fundraising process, and take legal action against any pre-existing and impending offerings, prompting dozens of Chinese trading platforms to shutter.
Fast forward to February 2021, and heightening crackdowns on crypto were still underway, with the Development and Reform Commission of Inner Mongolia issuing a draft rule aiming to put a stop to all energy-intensive crypto mining projects by the end of April as part of a larger Chinese commitment to carbon neutrality. “Inner Mongolia will tighten its energy control measures and bear the targets throughout all economic and social aspects,” the draft rule stated, with an emphasis on crypto mining.
Despite these mounting prohibitions, and in light of China’s unwillingness to treat “cryptocurrencies as legal tender or a [permissible] tool for retail payments,” according to the Library of Congress, something that it is expected to double-down on in light of the recent announcement of a national digital currency, regulators do not actually penalize the possession of crypto, such as Bitcoin or Ether. (This is distinct from India, for instance, which is expected to “propose a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets,” Reuters reported in mid-March). Nonetheless, the Chinese crackdowns that have come into play in recent years have dampened some of the former interest in cryptocurrency-related activities, including NFTs.
“Right now, Chinese people are not crazy about cryptocurrencies in China,” according to Beijing-based attorney Shen Wenhao, who specializes in foreign investment, cross-border M&A, VC/PE and capital markets. “Since the Chinese government banned ICOs and closed down crypto exchanges in 2017, crypto has never reached the same level of popularity in China again.” This is, in large part, “because Chinese people’s access to crypto has been significantly limited” as a result of government controls, which Shen says has made it “very hard for Chinese people to buy or sell cryptos.”
More than that, he notes that the “publicity of bitcoins and altcoins has been limited in mainstream [Chinese] media,” thereby, leading to muted enthusiasm compared to other markets. And still yet, even if the appeal of NFTs is budding among groups of eager netizens, the situation is further muddied by questions surrounding the future of the small-but-growing number of NFT-trading platforms and crypto art marketplaces in China.
“I do not think NFT-trading platforms will be [deemed] legitimate in China, because an NFT is still a cryptocurrency despite its unique features,” Shen tells TFL. And “without a China-based open market to buy and sell NFTs, I do not see how this market can boom in China.” In other words, much like the many questions that loom in connection with the larger crypto industry, the future of NFTs in China remains unclear. “There is simply too much unknown from the Chinese law perspective.”
While few luxury brands have launched NFTs to date, in China or elsewhere, many have been looking to find ways to capitalize on the space in light of the rising adoption of digital assets by Gen Z and millennial consumers, in particular, and given the whopping $54 billion per year in luxury goods sales that come from Chinese consumers, alone. Brands like Louis Vuitton and Gucci, among others, have already ventured into the online gaming space by way of respective partnerships with League of Legends and Tennis Clash in order to generate real cash from in-game purchases, such as skins, making the leap to NFTs seem like the next reasonable digital extension.
The appeal of the digital assets is not outlandish. As Packy McCormick, the founder of business strategy newsletter Not Boring, got to the heart of the appeal of luxury-level NFT use for young consumers, at least, stating, “Imagine buying an NFT skin from Prada, wearing it to a concert in Fortnite, and then popping into a different version of the same concert in Roblox maintaining the same identity.” (He said that as of early this year, “smaller developers are making this possible.” In January, for instance, “Cryptovoxels, Somnium Space, and Decentraland announced that they’re working to let users portal between worlds.”).
And at the end of the day, the notion of acquiring digital assets and applying them is really not so unfamiliar. Francesca Muston, vice-president fashion, at trend forecaster WGSN, told the Guardian that “people have been applying filters to their Snapchat and Instagram for years, [and] digital fashion” – including NFTs – “is simply an extension of that.” The idea of acquiring a dress that exists exclusively online and embedding it onto yourself in photos “feels [like a] very futuristic” trend, she asserts. However, such capabilities are already here, and “so, the appeal of being able to control your image online is very much part of mainstream culture.”
As of now, Shen says that issues specific to NFTs — from regulatory questions to examples of the role that intellectual property will play — have not been tested in Chinese courts. That may soon change, though, as consumers across the globe continue to express interest in NFTs and regulators simultaneously zero-in on this budding use of tech.