Hong Kong's “Declaration” opens a breakthrough for Mainland NFTs

Source | 01 Blockchain Author| Bai Liang

Through the “Policy Declaration on Hong Kong's Virtual Asset Development” (“Declaration”), Hong Kong declared its ambition to compete for a global virtual asset center in the digital economy era. The mainland industry has also been ignited; it may even be more burning than Hong Kong.

The “metaverse” is in full swing in the mainland, and dozens of regions and cities have released metaverse development plans. However, in the development of the metaverse, apart from investment in related industries, what the industry is most concerned about is the transaction of virtual assets in the metaverse economy. NFTs are the main vehicle for this type of virtual asset.

The mainland has strict restrictions on virtual asset transactions, and NFTs became “digital collections” after “de-financialization” in the mainland. However, the functions and markets of digital collections are far from meeting the needs of metaverse development.

The establishment of a compliant virtual asset market in Hong Kong may open up a breakthrough for the mainland's NFT market by drawing on the experience of cross-border transactions in traditional financial markets. Meanwhile, the “NFT confirmation, overseas transaction” proposed by Hengqin provided an idea of “mainland confirmation of rights, overseas transactions.”

Mainland NFT restrictions

There is broad scope for the development of the metaverse and NFTs in the mainland, but due to the stage of market development and regulatory requirements, the development of the virtual asset trading market is limited. For example, in NFTs, the mainland government and institutions have basically no longer used this term in public statements, but instead used “digital collection.”

In April 2022, the China Internet Finance Association, the China Banking Association, and the China Securities Association released the “Initiative on Preventing Financial Risks Related to NFTs”, which “resolutely curbs the trend of financial securitization of NFTs and strictly prevents the risk of illegal financial activities”: does not include financial assets in the underlying NFT products; does not weaken the non-homogenized characteristics of NFTs through division of ownership or batch creation, and carry out token issuance and financing (ICO) in disguise; does not provide services such as centralized trading, continuous listing transactions, standardized contract transactions, etc. ; Virtual currencies such as Bitcoin, Ether, and Tether are not used as pricing and settlement tools for NFT issuance transactions; financial institutions do not directly or indirectly invest in NFTs and do not provide financing support for investing in NFTs.

There is basically no convenient secondary market for digital collection transactions in the mainland, eliminating the possibility of financialization. Currently, there are thousands of digital collection platforms, but the overall transaction scale is still very small.

The metaverse and creator economy will generate a large number of virtual assets. Virtual asset transactions provide a new way for entrepreneurs, creators, and investors in this field to monetize returns. Without a virtual asset market, returns can only be achieved through traditional sales revenue and equity appreciation, and excessive revenue from innovation cannot be obtained.

Just like the blockchain industry in the past few years, the business model of most blockchain companies has actually become software outsourcing and has not created a new business model or economic model. As a result, investment opportunities to obtain social capital have declined, and the growth rate of blockchain entrepreneurship has also declined. Until now, there are no blockchain-supported listed companies born in mainland China.

NFT planning in Beijing and Shanghai

This issue has received sufficient attention. Among the metaverse industry policies in various regions this year, the policies of first-tier cities such as Beijing and Shanghai all expressed concern and development of the NFT market.

The “Beijing Urban Sub-Center Metaverse Innovation and Development Action Plan (2022 to 2024)” states “Vigorously develop digital asset trading services. Explore the full life cycle management of digital asset rights to provide safe, stable and trustworthy digital asset trading services. ... Track cutting-edge trends in NFT technology,... explore digital cultural and artistic asset trading and financial service systems supported by blockchain and digital finance, explore the construction of digital asset platforms, and achieve the creation, distribution and circulation of digital assets.”

The “14th Five-Year Plan for the Development of the Digital Economy in Shanghai” states “supporting leading enterprises to explore the construction of NFT trading platforms, research and promote the digitalization of NFTs and other assets, the global circulation of digital IP, and digital rights protection.” The “Shanghai Action Plan to Cultivate a New Circuit for the “Metaverse” (2022 to 2025)” states “Pilot the establishment of a digital asset trading section on the Shanghai Data Exchange to cultivate and improve the digital asset factor market and promote the standardized development of the digital creative industry. Gradually improve compliance transaction mechanisms for digital assets, digital art, digital film and television copyright, etc.”

However, it is very difficult to break through the regulatory system; it is rooted in the mainland's real economy structure, capital structure, investor structure, and financial culture. Predictably, the mainland is unlikely to liberalize NFTs with financial attributes over a long period of time.

Hong Kong market

The “Declaration” stated, “Hong Kong has a thriving virtual asset ecosystem, which can be presented through the issuance of non-homogenized tokens (NFTs) in our market, metaverse developers, and even the use of DLT activities in trade finance. If we look at more other uses of virtual assets, such as trade in art and collectibles, tokenizing antique objects, or tokenizing different types of products (such as debt securities) from the perspective of financial innovation, we will surely be able to usher in greater opportunities.”

The Hong Kong Treasury and Investment Promotion Department launched an NFT distribution pilot program during the 2022 flagship event “Fintech Week” to promote the use of NFTs.

According to Hong Kong's financial regulations, non-financial NFTs such as collecting are not subject to financial supervision. Financialized NFTs (which form a structure similar to equity under securities or collective investments) are subject to financial supervision.

Collectible and commodity NFTs can be made in the mainland and overseas, but currently NFTs with financial attributes can only be made overseas. The significance of the Declaration is that it further clarifies the goals and rules for developing the virtual market in Hong Kong, and clarifies the compliant virtual asset trading market in Hong Kong.

This provides a window for the mainland market to develop financial NFTs in compliance. Generate compliant virtual goods or assets in the Mainland and financialize them in a compliant manner in Hong Kong. Under the existing system and regulations, there are no substantial barriers in the case of confirmation of mainland authority and compliance in the Hong Kong market.

Hengqin Plan: Mainland China Confirms Rights, Overseas Transactions

Some regions are already seeing opportunities. In September of this year, Nie Xinping, deputy director of the Hengqin Guangdong-Macao Deep Cooperation Zone Executive Committee, said that Hengqin will “make good use of Macau as a platform to create an NFT authorized overseas trading center in the metaverse.”

The Hengqin Guangdong-Macao Deep Cooperation Zone is a special cooperation area under “one country, two systems”. “Focus on building a new system of integration with Macao and continuously improving a new system of joint management and sharing between Guangdong and Macao” (“Overall Plan for the Construction of the Hengqin Guangdong-Macao Deep Cooperation Zone”).

According to the “Overall Plan for the Construction of the Hengqin Guangdong-Macao Deep Cooperation Zone”, Hengqin will “establish a highly convenient market entry system. Implement the market entry commitment system, strictly implement the 'no ban and entry'... Formulate and introduce special measures to ease market access in cooperative zones. Strengthen supervision during and after the fact, and establish a supervisory standard and regulatory system linked to Macao and internationally.” “Promote the safe and orderly flow of international Internet data across borders.” “Increase the level of empowerment. Support cooperative zones to deepen reforms and expand opening-up in key areas such as economic management, business environment, and market supervision through a checklist application and authorization method.”

In an interview with the media, Nie Xinping said, “We have determined that the metaverse is a 'digital migration' for humans. The opportunities and impacts it brings to industry, technology, and society are unfathomable.” He hopes to use the metaverse as the “general driver” for Hengqin's development of the “four new” industries. In Hengqin's metaverse development concept, it includes building an NFT authorized overseas trading center.

The mainland confirmed its rights and went overseas to trade, which provided a compliance path for the development of Mainland NFTs. Meanwhile, the development of Hong Kong's compliant virtual asset market provides the most suitable overseas trading market.

(The author of this article is Bai Liang, founder of 01 Think Tank)

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