Shanghai official announced support for NFT trading platform, how to screen investment targets?

Original title: "Shanghai official announcement supports NFT trading platform, how do investors select high-quality NFT platform investment targets?"

原文作者：宋瑞秋 张毅 金欣 黄云 姜慧 王哲晖，金杜研究院

On July 12, 2022, The General Office of the Shanghai Municipal People's Government issued the "14th Five-year Plan for The Development of Shanghai Digital Economy", which clearly proposed to "support leading enterprises to explore the construction of NFT trading platform". As one of the hottest investment tracks in 2021, NFT (Non-Fungible Token) has successfully "made a breakthrough" in the field of encryption, attracting Internet head enterprises and professional investment institutions to enter the market one after another. At that time, the voice of "everything can be NFT" is constantly heard in the investment circle. This time, the Shanghai municipal government officially announced its support for the construction of NFT trading platform, once again pushing NFT to the forefront of investment horizons.

Because NFT is still emerging things, investors in the pursuit of NFT investment hot spot at the same time, can be in accordance with the following standards for potential investment targets of NFT trading platform for preliminary screening, to avoid "tread on thunder".

Standard 1: Does the NFT trading platform allow users to resell NFT?    

In China, NFT trading platform is also known as "digital art trading platform", colloquially similar to taobao in the traditional e-commerce industry. Domestic NFT trading platform generally casting and issuing NFT by PGC (Professionally Generated Content), that is, NFT trading platform and artists and other professionals jointly issue NFT of non-standard digital ownership certificate of physical/digital artwork.

As the regulatory environment of NFT in China emphasizes the collection property of NFT works of art and cracks down on speculation in THE NFT industry, the liquidity of the secondary market of NFT is limited. In April 2022, three industry self-discipline organizations such as Internet banking association issued "to preventing risks of NFT initiative", the original legal system of "cultural rights and interests of art" trading regulation extends to the field of NFT, stress concentration shall be not for NFT trading transactions and last traded services, shall not establish disguised illegal trading places, The side reflects the current supervision of NFT secondary market trading is likely to hold a negative attitude.

Therefore, the current mainstream NFT trading platforms do not support users to resell NFT. Investors should pay special attention to legal risks if they find that the NFT trading platform allows users to resell NFT during due diligence. In addition, there are still controversies in practice as to whether the behavior of user's donation of NFT belongs to the secondary market transaction. If the relevant practices of NFT trading platform are found in the process of due diligence, it is necessary to conduct prudent screening based on the time and terms of user's donation.

Standard 2: does the NFT trading platform involve virtual currencies such as Bitcoin?

The People's Bank of China announced in 2021 that virtual currency does not have the same legal status as fiat currency and cannot be used as currency in the market. Therefore, although bitcoin and other virtual currencies and NFT are based on blockchain, domestic NFT trading platforms are still not allowed to use virtual currencies as NFT pricing and settlement tools. At present, the NFT issuance of the mainstream NFT trading platform in the market is priced and settled in RMB through access to licensed payment institutions such as Alipay.

It is worth mentioning that in addition to the traditional equity investment, Token financing related to virtual currency is emerging in the investment circle. When investing in Web 3.0 projects (including overseas NFT trading platform), overseas PE will invest by subscription of tokens. However, due to the central bank's ban on all kinds of coin issuance financing activities, coin rights financing cannot be used as a legal investment method to invest in the domestic NFT trading platform.

Standard THREE: does the NFT trading platform have core business qualifications?

The application scenarios of NFT trading platform are diverse, but the following certificates are essential core business qualifications of common NFT trading platform, and investors need to check whether the investment target has been qualified during due diligence:

· Blockchain information service security assessment and registration.

· Value-added telecom business license (B25 ICP certificate is generally required for NFT trading platform, and B21 EDI certificate is also required for NFT trading platform involving third-party "Taobao Shop" mode).

In addition to the above core business qualifications, the NFT trading platform may also involve other business qualifications depending on the different types of digital works and business models of the PLATFORM. For example, a certain NFT trading platform has obtained the Network Culture Operation License in addition to the above core business qualifications because its NFT digital works involve musical works.

Because of NFT trading platform and business model for many types of digital works, and the applicable scope of all kinds of business qualification in practice is likely to be controversial, so whether a potential investment target has all of its business have already obtained the appropriate qualification certificates, need according to the actual situation in the process of due diligence for specific analysis.

Standard 4: For foreign investors, special attention should be paid to the restrictions on foreign investment on NFT trading platform

For foreign investors, special attention should be paid to the foreign capital restriction nature of NFT trading platform. As NFT trading platforms generally need to obtain VALUE-ADDED Telecom Business License B25 ICP certificate, the proportion of foreign capital shall not exceed 50%. In recent years, on the premise of meeting the restriction of foreign equity ratio, the license for value-added telecom business for foreign investment has been relaxed. In practice, it is no longer as difficult to obtain a license as before, and it is no longer an invisible obstacle to foreign equity ratio.

In addition, the different types of digital works (such as paintings, music, audio-visual programs, etc.) on the NFT trading platform may also have a further impact on investors' foreign capital restrictions. For example, if digital works on an NFT trading platform are audiovisual programs, the foundry and distribution of such NFT is likely to fall into the realm of foreign prohibition. Therefore, foreign investors can only temporarily sigh at the NFT trading platform engaged in such business.

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