Chinese prosecutors have released a report exploring the legal attributes and risks of non-fungible tokens (NFTs). The move comes as these digital assets are still a gray area despite the growing popularity of NFTs and digital art in China.

Chinese Officials Explore Risks Associated With NFTs

On Monday, the Supreme People’s Procuratorate of the People’s Republic of China published a report regarding the legal attributes of NFTs and risks associated with this emerging asset class. The report acknowledged that “relevant legal norms and regulatory rules” are not yet in place because it is an emerging field.

“While it has high popularity, it is very likely to cause financial risks, management risks, network security risks, etc., especially the legal risks. Prosecutors are paying close attention.”

Specifically, the report noted that some digital collections use marketing methods such as airdrops, mystery boxes, or limited sales to inflate prices. “There is no reasonable pricing mechanism and sufficient value support behind the inflated prices, and it is easy to deviate from the basic value law, leading to the accelerated formation of market bubbles.”

The authors also mentioned the risk of fraud, claiming that a digital collection might make illegal profits through false issuance and price manipulation. Furthermore, stances where an NFT collection offers incentives like “newcomer rebates” increase the risk of pyramid schemes.

“In addition, digital collections are often bundled with concepts such as metaverse and blockchain to attract new users. Marketing models such as rewards and dynamic rights and interests can easily evolve into illegal pyramid schemes that use the number of development personnel as remuneration or rebates.”

Another concern is the potential for illegal fundraising. Digital collections might incentivize buyers by offering fixed returns, equity opportunities, buybacks, and physical cash rewards. The report said such methods might be deemed unlawful for amassing public deposits without authorization and perpetrating fund collection scams.

One author also raised concerns about property rights related to NFTs. “Consumers do not enjoy the ownership of the NFT digital assets they purchase in the sense of civil law, and consumers cannot prohibit others from accessing, copying, or disseminating the digital assets mapped by NFT,” he said.

Chinese Prosecutors Outline Methods to Address NFT Risks

The procuratorate said the possible legal risks of NFTs had got its attention. “All types of financial activities must be brought under supervision in accordance with the law,” the authors wrote, outlining some steps that could help officials address challenges with NFTs.

First, the report suggested a crackdown on criminal activities committed under the guise of new technologies. The authors noted that officials need to protect “true innovation” while fighting crimes that are committed under the name of innovation.

“The procuratorial organs must be good at accurately grasping the boundaries between innovation and development and crimes, and must not only protect “true innovation” in accordance with the law, but also be able to promptly discover and accurately punish those who commit crimes in the name of innovation.”

The report added that regulatory agencies must bring emerging assets like NFTs under their supervision and give procuratorial organs related authority to prevent crime and promote social governance. They also need to “actively put forward relevant procuratorial suggestions.”

“The third is to strengthen risk research and judgment,” the report said, suggesting that officials conduct an in-depth analysis of current regulatory risks and hidden dangers of NFTs. Moreover, authorities need to study the financial and social risks involved in developing emerging technologies and provide advice for financial risk prevention and regulatory system improvement.

China Sees Massive Spike in NFT-Related Complaints

As reported, China has seen a sharp spike in NFT-related complaints over the past year. Chinese users submitted 59,700 complaints about NFTs in 2022, up 30,000% compared to the earlier year, which saw less than 200 complaints regarding digital collections.

The complaints were mainly focused on the non-delivery of purchased items, non-refund, maliciously driving up prices, charging high fees, and random banning of consumer accounts. The report noted that supervision would be more difficult with new fields such as digital collections.

NFTs are still a gray area in China. Despite introducing a blanket ban on cryptocurrencies, the Chinese government offers some leeway for digital collectibles to exist as long as they do not involve crypto assets like Bitcoin and Ethereum.

Last year, however, Beijing introduced a strict ban on secondary markets for digital collectibles. The harsh stance has already harmed the industry, forcing some NFT marketplaces to shut down.

This article originally appeared on The Tokenist

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