The Chinese government is expected to keep a wary eye on the country's mushrooming blockchain-backed "digital collectibles", but it is unlikely to impose an outright ban on non-fungible tokens (NFTs) as it has done with cryptocurrencies, analysts said.

As global interest in NFTs surges, Beijing has kept its attitude vague towards domestic projects. While Chinese authorities reportedly summoned tech companies last October to warn them against "hyping up" the concept, they have stopped short of declaring NFTs illegal.

China to create own NFT industry based on state-backed blockchain network

Chinese authorities are trying to ensure that NFTs are safe and controllable, analysts and industry insiders said.

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"China is cautious about NFTs," said Ma Xin, secretary of the Institute of Electrical and Electronics Engineers (IEEE)'s Digital Transformation working group. "China will not tolerate a NFT market full of scams just like the fake coins in the early days of blockchain development."

To keep domestic development of NFTs under control, the state-backed Blockchain Services Network (BSN) plans to launch infrastructure later this month to support the development of the technology, the South China Morning Post reported last week.

He Yifan, chief executive of Red Date Technology which provides technical support to BSN, said that NFTs "have no legal issue in China" as long as they distance themselves from cryptocurrencies like bitcoin.

Beijing has shifted its attitude towards cryptocurrencies over the years. While it initially tolerated investment by individuals, the government eventually launched a forceful crackdown as it began to view cryptocurrencies as a threat to financial stability and capital control.

To avoid government scrutiny, mainland companies have ditched the term NFT in favour of the more neutral "digital collectibles".

So-called digital collectibles are similar to NFTs, which convey ownership of digital assets such as an original artwork. However, unlike mainstream NFT projects, which are mostly backed by ethereum, digital collectibles are not linked to any cryptocurrencies, with trading heavily restricted.

Still, appetite from mainland investors has proven strong for digital collectibles minted by Post owner Alibaba Group Holding, Tencent Holdings and JD.com, as well as the official Xinhua news agency.

The government may not rush to ban NFT, said Matteo Giovannini, a senior finance manager at the Industrial and Commercial Bank of China.

"The regulators are genuinely interested in the nature and potential benefits of virtual assets, but not at the cost of the entire society," Giovannini said. "Therefore, a more supervised approach with the creation of isolated and safe sandboxes could give authorities the time necessary to better explore this asset class."

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One priority in China's regulation would be to block domestic investors from accessing overseas ethereum public chains through NFTs, said Wei-Tek Tsai, a member of IEEE, and director of the Digital Society and Blockchain Laboratory of Beihang University.

Cai Weide, director of the Digital Society and Blockchain Laboratory of Beihang University.

China will have an NFT market eventually, but its trading rules will be completely under government supervision, said Stanley Chao, managing director at business advisory firm All In Consulting.

Chao said China has learned a lesson from its crackdown on cryptocurrencies.

"China let cryptocurrencies get out of hand to the point that they had to shut it down cold turkey. They won't make the same mistake with NFTs," Chao said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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