China’s banking regulators issue warning against NFTs

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Three Chinese banking watchdogs have issued a warning against non-fungible tokens (NFTs) at a time when the industry has soared globally. 

The China Banking Association, the Chinese Internet Financial Association, and the China Securities Association issued a joint statement reminding all the commercial banks under their oversight that they have to abide by industry regulations when dealing with NFTs.

While acknowledging that NFTs are an innovative application of blockchain technology that can enrich the digital economy, the three watchdogs warned that they could potentially be used for money laundering, speculation, and illegal financial activities.

The regulators pointed out that Chinese banks must resolutely curb the tendency of NFT securitization. They issued six pointers for banks to adhere to when dealing with NFTs, with the first being that they must not use securities, precious metals, and other financial assets in the underlying commodities for NFTs. This bars the use of NFTs to represent ownership of physical assets such as real estate, which is one of the proposed long-term uses of digital collectibles.

China has banned digital asset trading, ICOs, and even block reward mining. However, it has yet to ban NFTs. This has presented a potential loophole since NFTs are almost always purchased through digital currencies. 

The three regulators warned against such practices, stating that Chinese investors must not use “virtual currencies such as Bitcoin, Ethereum, and Tether as the pricing and settlement tools for NFT issuance transactions.”

Banks must carry out real-name authentication for issuing, selling and purchasing entities, properly preserve customer identity information and issuance transaction records, and actively conduct anti-money laundering checks.

Banks must also not directly or indirectly invest in NFTs nor provide financing for those investing in the digital collectibles.

The three regulators are not the first to bash NFTs in China. Through various means such as state agencies and state-controlled media outlets, the Chinese government has been discouraging investors from NFTs for months now. Last week, the Economic Daily, a mouthpiece for the ruling Chinese Communist Party, called for more stringent regulation of NFTs. It further spoke out against treating them as creative products and called on the government to assign them currency, commodity or security status. 

Two weeks ago, China’s largest messaging service WeChat banned a large number of accounts associated with NFTs. While it acknowledged that NFTs aren’t entirely banned, it reminded users that it doesn’t allow the secondary sale of these digital collectibles.

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