It's no secret that China has a clear disdain for all things crypto, as was highlighted last year when the country decided to ban its digital asset industry in its entirety. That said, one niche related to the crypto industry that has continued to thrive in the region despite the ban is its nonfungible token (NFT) market. However, with certain negative developments coming to the forefront recently, this may not be the case much longer.

In this regard, many local social media platforms and internet firms have continued to update their policies so as to restrict and, in some cases, remove NFT platforms altogether from their networks, claiming a lack of regulatory clarity but, more importantly, fearing a government clampdown on their day-to-day operations.

For example, WeChat, a Chinese instant messaging and social media service that boasts of an active customer base of over 1 billion users, recently took down one of China's most prominent NFT ecosystems Xihu No.1 from its platform, stating that it was violating its active rules of service. Similar actions were also taken against other projects, including Dongyiyuandian.

In a similar vein, Ant Group-backed WhaleTalk, a digital collectible platform, has increased the penalty for individuals making use of its over-the-counter desk for the purpose of NFT trading in a recent policy update. 

Vagueness regarding NFTs reigns supreme in China

While the use of cryptocurrencies is completely banned across mainland China, the Xi Jinping regime had not shown any intentions of banning NFTs up until now. This is best showcased by the fact that Chinese business juggernauts, such as Tencent and Alibaba, have filed for several new NFT patents over the past year.

However, as with any evolving market, the rising popularity of digital collectibles in China has resulted in many of these offerings being subject to intense price speculations and consumer fraud cases. To this point, the growth of illegal transactions and bot purchases associated with NFT platforms has resulted in many tech giants taking precautionary measures that are probably in their best interests. 

In fact, following the announcement of China's blanket crypto ban last September, many local firms were found to be still aiding crypto transactions. Thus, the actions of WeChat and WhaleTalk seem to be quite reasonable, especially since they are most likely looking to avoid any type of regulatory scrutiny from the Chinese government. 

Lastly, it is important to point out that even though NFTs are not necessarily banned in the country, China has prohibited its citizens from indulging in any form of speculative trading associated with digital collectible-derived tokens, thus putting NFTs issuers and owners in a tight spot.

Experts weigh in

Philip Gunwhy, partner and brand strategist for prominent NFT platform Blockasset.co, told Cointelegraph that Tencent and Ant Group's change in policy on how their users interact with NFTs is not unexpected because in order to gain a competitive advantage within the confines of China's existing legislative framework, tech giants must reposition their platforms, adding:

"The government has not yet outlawed NFT trading, with the rules still being worked out. Even if Chinese authorities do eventually ban NFTs, creators and investors will still have an advantage since it took nearly a decade for the government to finally rid its shores of Bitcoin mining and crypto transactions. The NFT space keeps evolving, and major internet companies' patent applications in China are to be taken seriously."

Gunwhy further stated that the fact the government has not banned engagement with NFTs, despite their current popularity, indicates that the approach may be very different from that taken with cryptocurrencies. "In any case, officials in China want to keep a close eye on the development of NFTs," he said

Haris Sevinç, chief technology officer of The Unfettered — a blockchain game utilizing NFT- and metaverse-centric concepts — believes that while the Chinese government is hostile toward digital currencies, the country's obsession with blockchain technology has allowed investors to continue harnessing the power of technologies — such as NFTs — that don't depend entirely on crypto.

He believes that the moves of major internet companies to alter their rulebooks are solely motivated by a desire to avoid regulatory action because if they defy the government, they will most likely either face a fine or be banned. Sevinç added:

"Because the NFT ecosystem is still in its early stages, most regulators are only warming up to this idea and trying to assess its prospects. If authorities implement a positive form of regulation in the NFT space, these tech giants [Tencent and Alibaba] will be among the pioneers of the future of Web3 in China. In that case, the patent bets will keep coming in."

The future of NFTs in China may be fractured

Ben Caselin, head of research and strategy at crypto exchange AAX, told Cointelegraph that as things stand, "NFTs are somewhat tolerated in China" and are being labeled and marketed as digital collectibles. "These are issued on more restrictive hybrid or permissioned blockchains that prevent holders from speculating on secondary markets," he added. 

In Caselin's opinion, while these domestic markets may flourish for a while, permissioned NFTs do not offer many core features or advantages, such as ownership, and, therefore, don't really benefit from the same dynamics as mainstream NFTs.

Jake Fraser, head of business development at Mogul Productions — a decentralized film financing and movie-based NFT platform — believes that there is still a lot of opportunities when it comes to the Chinese market, especially with NFTs:

"There is always going to be constant legislative updates and companies updating their policies, but innovation is still taking place. One area in their NFT market that is gaining momentum is gamification. It will be interesting to see the different use cases that unfold from this."

Lastly, Fraser highlighted that trading NFTs is still a novel idea globally, and to date, he hasn't seen any governments put in real regulations. Although, like what happened with initial coin offerings, he does believe legislation is inevitable, but as long as innovation isn't stifled, the developments will be "very good for the industry."

Not everyone agrees

Contrary to Caselin's assertions that NFTs are on an extremely short leash in China, Vijay Pravin Maharajan, founder and CEO of bitsCrunch — an NFT-focused analytics firm — told Cointelegraph that the list of NFTs being transacted in yuan continues to grow and that the Chinese government will soon accept the asset class, adding:

"Strict rules and agreements established around NFTs and digital collectibles make the industry viable. The Chinese government is trying to ensure NFTs are safe and regulated. There's no denying that [China] is a leading country when it comes to blockchain technology. So, we might get a glimpse of Web 3.0 from them soon."

Maharajan said that contrary to popular perception, China is indeed embracing NFTs by making their infrastructures "independent of cryptocurrencies." He believes that it's okay to disrupt the traditional NFT framework and follow a new business model since these offerings are unique and have multiple ways through which they can be minted, distributed and transacted. "Even though it may seem like a slow start, so far, we see a positive trend with the acceptance of NFTs irrespective of crypto bans and their effects," he noted.

Therefore, as we head into a future being driven increasingly by decentralized technologies, such as NFTs, it will be interesting to see how a major financial mover and shaker such as China continues to evolve its digital outlook and regulate these assets.