It’s no secret that China despises all things crypto, as seen by its decision to prohibit the entire digital asset market outright last year. Despite the restriction, one segment of the crypto sector has thrived in the region: the nonfungible token (NFT) market. However, this may not remain the case for much longer with recent bad developments.

Many local social media platforms and internet companies have continued to amend their policies to restrict and, in some cases, altogether remove NFT sites from their networks, citing a lack of regulatory clarity but, more crucially, fearing a government crackdown on their daily operations.

For example, WeChat, a Chinese instant messaging and social media service with over 1 billion active users, recently removed Xihu No.1, one of China’s most popular NFT ecosystems, from its platform, citing a violation of its active rules of service. Other projects, notably Dongyiyuandian, were targeted in the same way.

In a similar line, in a recent policy update, the Ant Group-backed WhaleTalk, a collectable digital platform, doubled the penalty for persons using its over-the-counter desk for the purpose of NFT trading.

In China, ambiguity reigns supreme when it comes to NFTs

While the usage of cryptocurrencies is prohibited throughout mainland China, the Xi Jinping dictatorship has shown no intention of prohibiting the use of NFTs until recently. The fact that Chinese commercial behemoths like Tencent and Alibaba have applied for multiple new NFT patents in the last year exemplifies this.

However, like with any growing market, the increased popularity of digital collectibles in China has led to severe price speculation and consumer fraud incidents. To date, the rise in unlawful transactions and bot purchases associated with NFT platforms has prompted numerous digital behemoths to take preventative steps that are likely in their best interests.

In fact, numerous local firms continued assisting crypto transactions after China’s blanket crypto ban was announced last September. As a result, WeChat and WhaleTalk’s actions appear to be legitimate, especially given that they are most likely attempting to escape any regulatory attention from the Chinese government.

Finally, while NFTs are not necessarily outlawed in China, its residents are prohibited from engaging in any type of speculative trading involving digital collectible-derived tokens, putting NFT issuers and owners in a difficult position.

Experts weigh in

Tencent and Ant Group’s shift in policy on how their users interact with NFTs is not surprising, according to Philip Gunwhy, partner and brand strategist for prominent NFT platform Blockasset.co, who added: “In order to gain a competitive advantage within the confines of China’s existing legislative framework, tech giants must reposition their platforms.”

“The government has not yet made NFT trading illegal, as the laws are still being ironed out. Even if Chinese authorities do eventually restrict NFTs, innovators and investors would benefit because it took nearly a decade for the government to finally outlaw Bitcoin mining and crypto transactions on its soil. The NFT market is constantly expanding, and patent filings from big internet businesses in China should be regarded seriously.”

The fact that the government has not restricted interaction with NFTs, despite their current popularity, shows that the approach taken with cryptocurrencies may be significantly different, according to Gunwhy. “In any event, Chinese officials are keeping a careful eye on the progress of NFTs,” he stated.

While the Chinese government is hostile to digital currencies, Haris Sevinç, chief technology officer of The Unfettered — a blockchain game based on NFT and metaverse concepts — believes that the country’s obsession with blockchain technology has allowed investors to continue to harness the power of non-crypto technologies like NFTs.

He believes that large internet businesses’ actions to change their rules are purely motivated by a desire to avoid regulatory action because defying the government will almost certainly result in a fine or a ban. Sevinç continued:

“Because the NFT ecosystem is still in its early stages, most regulators are only warming up to this idea and trying to assess its prospects. If authorities implement a positive form of regulation in the NFT space, these tech giants [Tencent and Alibaba] will be among the pioneers of the future of Web3 in China. In that case, the patent bets will keep coming in.”

In China, the future of NFTs could be shattered

According to Ben Caselin, head of research and strategy at crypto exchange AAX, “NFTs are relatively tolerated in China” at the moment and are being classified and sold as digital collectibles. “These are issued on more restrictive hybrid or permission blockchains,” he explained, “which preclude holders from speculating on secondary markets.”

While these domestic markets may prosper for a time, permission NFTs, in Caselin’s opinion, lack many key features or advantages, such as ownership, and hence do not profit from the same dynamics as mainstream NFTs.

When it comes to the Chinese market, Jake Fraser, head of business development at Mogul Productions, a decentralized film funding and movie-based NFT platform, believes there are still plenty of opportunities:

“There will always be regulatory changes and firms revising their practices, but innovation will continue to happen.” Gamification is one area of their NFT industry that is gaining traction. It’ll be interesting to see how this plays out in different scenarios.”

Finally, Fraser stated that trading NFTs is still a fresh concept around the world and that no countries have implemented real rules to date. Although like with initial coin offerings, he believes law is unavoidable, he believes the advances will be “quite positive for the sector” as long as innovation is not impeded.

Not everyone is in agreement

Despite Caselin’s claims that NFTs are on a short leash in China, Vijay Pravin Maharajan, the founder and CEO of bitsCrunch, an NFT-focused analytics firm, told Cointelegraph that the list of NFTs being transacted in yuan continues to grow, and that the Chinese government will soon accept the asset class.

“The market is feasible because of the strict laws and agreements that have been formed surrounding NFTs and digital collectibles. The Chinese government is working to make NFTs as safe and regulated as possible. There’s no doubting that [China] is a pioneer in the field of blockchain technology. As a result, we may soon see a glimpse of Web 3.0 from them.”

According to Maharajan, China is embracing NFTs by making its infrastructure “independent of cryptocurrencies,” contrary to popular belief. He argues that disrupting the existing NFT framework and adopting a new business model is acceptable because these services are unique and may be minted, distributed, and transacted in a variety of ways. “Even though it may appear to be a slow start,” he said, “we are seeing a positive trend with the acceptance of NFTs so far, regardless of crypto restrictions and their consequences.”

As we go into a future dominated by decentralized technologies like NFTs, it will be interesting to see how China, as a key financial mover and shaker, continues to evolve its digital worldview and regulate these assets.