Author: Liu Honglin
Recently, several NFT digital collection entrepreneurs registered in Hainan communicated with Lawyer Honglin and said that the company was preparing to cancel its registration or move to other cities.
The reason is a notice issued by the local Market Supervision and Administration Bureau of Hainan in conjunction with other departments. The content of the notice is very clear, requiring companies operating NFT digital collection businesses in the jurisdiction to submit their business qualifications within a limited time, otherwise "the relevant responsibilities shall be borne by the company itself."
It stands to reason that it is a good thing for the government to regulate industry development, but things are obviously not that simple.
Lawyer Honglin browsed the full text of the notice and his overall feeling is: the local government's requirements for the qualifications of the NFT digital collection industry are said to be necessary to promote the healthy development of the digital collection industry, but in fact they are a one-size-fits-all lazy policy of the local government.
In the NFT digital collectibles industry, it’s time to say goodbye to Hainan (passively).
According to the requirements of the local Market Supervision and Administration Bureau, the qualifications required to operate NFT digital collections in Hainan are:
(1) Internet Information Service License (ICP).
(2) Value-added Telecommunications Business License EDI.
(3) Record keeping of art business (Note: Article 5 of the Measures for the Administration of Art Business stipulates that any business entity that establishes an art business entity shall apply for a business license from the industrial and commercial administration department of the people's government at or above the county level where it is domiciled, and shall register the business with the cultural administration department of the people's government at or above the county level where it is domiciled within 15 days of receiving the business license).
(4) Blockchain filing.
(5) Internet culture business license.
(6) Internet Publishing Services License.
(7) Auction license (Note: Article 11 of the Auction Law of the People's Republic of China: An enterprise must obtain approval from the department responsible for the administration of the auction industry of the people's government of the province, autonomous region or municipality directly under the central government where it is located before it can obtain a license to engage in auction business. Auction enterprises may be established in cities divided into districts).
(8) Level 2 or 3 filing of information security protection.
(9) Trading market establishment license (Note: Article 2 of the Interim Measures for the Administration of Trading Venues in Hainan Province: The trading venue referred to in these Measures refers to a trading venue established within the administrative area of Hainan Province in accordance with the provisions of the State Council and approved by the provincial government for equity trading, commodity trading and other standardized contract trading, including trading venues that do not use the word "exchange" in their names, but excluding trading venues engaged in financial product trading for which the financial management department of the State Council performs daily supervision duties.
Which digital collection companies need to obtain the above 9 qualifications? The local government adopts a one-size-fits-all approach.
The notice states that "if an enterprise conducts digital collection business, especially opening a secondary market for transactions, it must have the above qualifications. If it does not have the above qualifications and conducts business without authorization, and is suspected of illegal and irregular behavior, the relevant industry authorities will impose administrative penalties, and if it constitutes a crime, criminal liability will be pursued in accordance with the law."
This means that whether the digital collectibles platform as understood by industry practitioners only has primary market sales activities, or whether it has a secondary function to allow users to exchange collectibles, the above qualifications are required.
Are the compliance requirements of the local government really reasonable and legal? I don’t know what others think, but my personal opinion is that the legality and rationality are questionable.
We know that there are roughly two mainstream business models for NFT digital collections in China. One is to only sell NFT digital collections and not support the circulation between users. Well-known companies in the industry include Whale Tank. Under this business model, the issuer only sells digital collections as virtual goods. Regardless of the rights and interests bound to the digital collections sold, they are typical commodities from a legal point of view, except that these commodities are virtual commodities in the digital age. In this scenario, the issuer earns the sales fees of the goods, and the platform earns the fees for technical services, which is completely legal and compliant. In this case, for the operators of digital collections, their business model and business scope are not special, except for the current mainstream e-commerce websites, and their qualification compliance requirements are naturally not special.
The second model is based on the first model. The platform supports the circulation of collections between users, such as consignment or purchase, which is similar to the "circulation behavior" of the second-hand Xianyu platform. Due to the sensitivity of the word "Token" in the Chinese context and the prevention of financial risks, transaction-based circulation between users has become a compliance focus in the digital collection industry. Internet giants and other companies are more cautious and often do not support paid circulation functions between users. They also impose multi-dimensional restrictions on users' circulation functions to avoid speculation. Users can only trade privately or through third-party software.
This time, the local government departments in Hainan Province have set qualification thresholds for the operation of digital collections by issuing documents, regardless of the differences in business models. These require that in addition to the value-added telecommunications licenses (ICP, EDI) and cultural and online cultural licenses that already meet the basic compliance requirements for Internet companies, they should also apply for auction licenses, trading market opening licenses and other qualifications that have nothing to do with the business model. This is somewhat unreasonable.
For example, the local government requires that platforms operating digital collections need to have an online publishing license, which is a bit unreliable. Whether NFT digital collections constitute online publications is a question in itself. Take the virtual combination of NFT tickets or membership rights NFTs that are more common in the digital collection industry as an example. As a seller, the sale of NFTs is either to attract traffic and promote consumption, or it is simply brand marketing and publicity. Does a simple picture or painting belong to online publication? Regardless of the actual business, a one-size-fits-all requirement for applying for a certificate obviously does not matter how much money it costs for entrepreneurs to apply for this certificate, and whether they can get this certificate.
In fact, the restrictions on the NFT digital collection industry are still a small matter, but often things can be seen from the small. Hainan’s introduction of relevant restrictive policies shows that in the past year or so, the local government departments have been troubled by the rights protection and complaints of customers in the digital collection industry, so they simply banned it. However, this lazy move by the government is obviously not in line with the current national policy on promoting the development of private enterprises.
Without going into the distant past, let’s just talk about the “31 Articles to Promote the Private Economy” issued by the State Council on July 19 this year. The first requirement of the central government to local governments is: continue to break down market access barriers.
Article 1 of the Opinion: All regions and departments shall not set or disguise entry barriers in the form of filing, registration, annual inspection, certification, accreditation, designation, or requiring the establishment of branches. Clean up and standardize the pre-conditions and approval standards for administrative approval, licensing, filing and other government service matters. Government service matters shall not be converted into intermediary service matters. Without legal and regulatory basis, enterprises shall not be required to conduct self-testing, inspection, certification, appraisal, notarization or provide proof before government services are provided.
Under this circumstance, Hainan's local government, in order to facilitate and save trouble in managing enterprises, has established market access barriers against policy encouragement, which is somewhat contrary to national policy.
At the beginning of 2022, when the NFT digital collection industry was developing in full swing, lawyer Honglin communicated with a local NFT entrepreneur in Hangzhou. I asked him why so many companies in the industry have registered in Hainan, where qualifications are easy to apply for and tax incentives are many? He said: Hainan seems to be relaxed, but it will take some time to accept new things.
It seems that this time in Hainan is only one year.
This article is not to encourage entrepreneurs registered in Hainan to confront the government, because there is really no need. A gentleman does not stand under a dangerous wall, and a good bird chooses a tree to roost. Good entrepreneurs do not fight with local governments, because you can't win anyway. Since the local government has expressed its unwelcome attitude, the best way for entrepreneurs to deal with it is to go with the flow and say goodbye to Hainan quickly and decently, cancel the company if necessary, and relocate the address if necessary. After all, in addition to Hainan, there are places that are more friendly to Internet and new economy entrepreneurship, such as Hangzhou, Shenzhen, and Chengdu.
The only hope is that when local entrepreneurs in Hainan want to cancel or relocate their companies, the counter staff at the Market Supervision Administration will no longer put up a hurdle and say: Someone has filed a complaint against your company, and we cannot handle the industrial and commercial changes.