China To Launch State-Backed NFT Marketplace, But ’Cryptocurrency’ Still Illegal

January 4, 2023
After making cryptocurrency trading and mining illegal in 2021, China has unveiled its first "national-level compliant" exchange for the secondary trading of non-fungible tokens (NFTs).

After making cryptocurrency trading and mining illegal in 2021, China has unveiled its first "national-level compliant" exchange for the secondary trading of non-fungible tokens (NFTs).

The China Digital Asset Trading Platform (CDEX) is backed by the Chinese state and is part of a new public-private partnership that seeks to promote “cultural digitalisation”.

As reported by state media outlet China Daily, cultural digitalisation is Beijing’s new strategy to tokenise assets, such as intellectual property rights and digital copyrights.

This aligns with Beijing’s vision of leveraging blockchain to protect homegrown scientific and technological achievements from copyright theft.

CDEX, which was unveiled in a ceremony in Beijing on New Year’s Day, will be jointly operated by the China Technology Exchange, a state-run intellectual property rights agency, and the China Cultural Relics Exchange Centre, another state agency that will provide CDEX’s custom-made blockchain.

The third partner is the Huaban Digital Copyright Centre, a privately-owned technology company based in Beijing.

Despite its “big reveal” ceremony in Beijing, CDEX is yet to launch, and is currently taking applications from those who are interested in trading on it.

According to CDEX’s website, applications are currently open until the end of this week.

As China’s first platform for the secondary trading of blockchain-based digital copyrights, otherwise known as NFTs, CDEX will be the only legal venue for this type of trading activity.

Open to both institutions and individuals, the platform will allow users not only to buy and sell but also to register, monitor, verify and protect their copyrights when tokenised as NFTs.

NFTs without crypto

Due to its centralised structure, CDEX already differs significantly from NFT marketplaces that have gained popularity in many other markets over the past three years.

Typically, the most popular NFT marketplaces are decentralised and are built as applications that interface directly with an underlying blockchain. These are known as decentralised apps, or “dapps”.

These decentralised NFT marketplaces are also built on blockchains that have their own native cryptocurrency, which is used by traders as a means of payment.

OpenSea, for example, the world’s largest NFT marketplace, is built directly on to the ethereum blockchain, and about 98 percent of its volume is traded using ether, ethereum’s native currency.

In contrast, as cryptocurrencies are now illegal in China, CDEX users will transact using the Chinese yuan only.

For those who have used one of China’s centralised marketplaces for the primary trading of NFTs — referred to in China as “digital collectibles” — this will be a familiar experience.

For example, Alibaba’s Jingtan facilitates primary trading of NFTs using yuan, as did Tencent’s Huanhe, until it shut down in August 2022, just one year after its launch.

Although it is still unclear as to why Tencent shut down Huanhe, at the time it was widely speculated that it was due to increased regulatory scrutiny on NFTs from Beijing.

Alibaba’s Jingtan is still active, but due to rules against secondary sales of NFTs in China, users can only buy and then hold their NFTs, and cannot lock in a profit by re-selling them to someone else.

“Basically, all you can do is buy an NFT and kind of keep it and wait for government policies to change,” said Emily Parker, executive director for global content at CoinDesk.

With the launch of CDEX, and its blessing from the Chinese state, this appears to be the first sign that this wait-and-see approach to regulatory change is bearing fruit.

Avoiding another ‘crypto bubble’

When Beijing moved to ban cryptocurrency trading and mining in 2021, it was largely in response to the rampant speculation that had taken hold of the crypto markets during that year.

Among regulators, these fears are still present, even as Beijing moves to centralise and standardise the country’s infrastructure for trading NFTs.

As reported by China Electronic Banking Network (CEBET), discussions are currently underway as to how CDEX can protect against “excessive speculation”, by introducing measures such as transaction time and price restrictions.

There is also the wider regulatory backdrop to China’s standardising of NFT trading, which can be seen in its increasing application of commercial rules to the handling of data.

Last month, the Central Committee of the Communist Party of China and the State Council outlined 20 data measures that they believe are integral to the growth of China’s digital economy, in which CDEX is expected to play a major role.

These include a proposal for data rights to come under a new framework that follows a “separation of three rights”, namely the right to hold data, the right to process or use data, and the right to manage data products.

Also last month, a Chinese court ruled that “digital collectibles” should be categorised as “virtual property”, and should be afforded the same protections offered by China’s e-commerce laws.

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