As the tide recedes, has the "thunder" of digital collectibles exploded?

Written by: Xiao Za Team

On March 25, the Hubei Provincial Public Security Department announced that the Public Security Bureau of Yuan'an County, Hubei Province, recently cracked a "digital collectibles" fraud case. Eleven criminal suspects from a certain digital collectibles platform operating company have been subjected to criminal coercive measures, with the amount involved exceeding 12 million yuan. This case is the first "digital collectibles" fraud case in Hubei Province.

"Digital collectibles players," a title that has become one of the countless tears of the internet era as the digital collectibles craze faded in 2024. As former friends began to embrace the new trend of AI, countless players still immersed in the digital collectibles industry started to feel a sense of loss, as if they had been abandoned by the times. Earlier this year, a criminal judgment by the Shenzhen Futian District People's Court regarding fraud on a digital collectibles trading platform caused a stir in the industry, but now, the renewed criminal involvement of a certain digital collectibles platform in Hubei has left many players with a helpless sigh: "Alas, digital collectibles, ultimately, were a wrong investment."

Now, players still on the digital collectibles platform are like Schrödinger's cat placed in a box; until the final outcome of the platform is revealed, no one knows whether their future state will be "sudden wealth" or "a beautiful dream." Everyone is worried about becoming the next victim, and when the tide goes out, what appears on the cold beach before them seems to ultimately be the words "financial disaster."

The Lost Digital Collectibles Players: How Were They "Destroyed" by Digital Collectibles?

On March 26, the day after the announcement of Hubei's first digital collectibles fraud case, a self-media published an article titled "The Destroyed Digital Collectibles Player—A 31-Year-Old Programmer Who Delivered Takeout and Took Out Loans for Digital Collectibles." The article featured a player from a certain digital collectibles platform, tearfully accusing the digital collectibles craze of draining the savings of two generations of his family to invest in the platform, even accumulating debts of over 100,000 yuan, ultimately having to take on multiple part-time jobs to fill the gap. The protagonist of the story lamented, "Digital collectibles have devolved into a speculative game of hot potato, just a matter of who runs faster."

But why did the once-popular digital collectibles become a "speculative game," and how were countless digital collectibles players "destroyed" by the platform in this "game"? Now, as we revisit these questions, it seems more like a genuine review of this "game," returning to the essence of digital collectibles to see where the risks of financial disaster lie.

In previous articles, the Xiao Za team has discussed that, within the context of Chinese law, digital collectibles are better defined as: certificates of virtual property or property interests that are generated based on blockchain and other cryptographic technologies, with confirmed ownership and authenticity that cannot be replicated, modified, or divided. Their legal nature is primarily just a number tag, not the copyright of the work itself, nor the property rights contained in the work. When digital collectibles are announced in a trustworthy technological form, allowing buyers to share part of the copyright with the IP party, they hold value for buyers. In other words, the transaction of digital collectibles is essentially a form of rights sharing, where the object of the transaction is a rights certificate, and consumers form a creditor relationship with the purchased digital collectibles, rather than acquiring ownership of the actual work.

The trading behavior of digital collectibles can be divided into incidental trading and operational trading. The former, as the name suggests, refers to incidental buying and selling behavior between the holder of digital collectibles and buyers based on love for the IP, which is generally not prohibited by law unless the subject of the transaction violates legal regulations or public order and morals. The latter refers to the behavior of selling digital collectibles as a business, which can be divided into one-time sales and allowing multiple resales. From the current legal framework and policy trends, one-time sales of digital collectibles are still widely recognized, but in cases of multiple resales, due to the objective price inflation of collectibles, and the fact that buyers may be engaging in speculation on the platform to profit from price differences, this is where the compliance "landmine" of the platform lies.

Currently, platforms that allow T+0-5 trading models generally adopt two strategies to address compliance challenges: the first is to cooperate with various cultural exchange centers or trading centers. Based on the practical experience from a case handled by the Xiao Za team involving a bulk commodity trading market, this case was supervised by the Ministry of Public Security, and the involved platform was also a trading venue retained by the provincial financial office. The charge was fraud, with a request for life imprisonment, which was later changed to illegal business operations after defense, resulting in a first-instance sentence of 7.5 years. This shows that local trading centers and similar financial licenses cannot shield against the risks of illegal business operations under Article 225 of the Criminal Law.

The second approach is to operate independently, adopting an information matching model. To achieve the goal of not partnering with trading centers, NFT trading platforms have explored various avenues and ultimately adopted a consignment model similar to luxury second-hand platforms, earning a commission of 5%-10% or even higher. Based on the Xiao Za team's experience as second-hand luxury goods appraisers, the legitimate owners of second-hand luxury goods are pawn shops with pawn licenses. Currently, some provinces and cities have provided "local grain tickets" to encourage second-hand goods trading—adding this business to their operational scope. However, whether digital collectibles can be classified as living materials remains unclear in the context of market management.

Revisiting Digital Collectibles Compliance: How to Redeem in the "Post-Digital Collectibles Era"

Previously, the Xiao Za team has repeatedly sounded the alarm about the risks in the digital collectibles industry. Now, in the "post-digital collectibles era," when we revisit this topic, the platforms' responses to risks and compliance construction are what players already trapped in the situation truly desire: redemption from this "financial disaster game" brought by platform compliance.

1. Platforms Must Obtain Administrative Licenses Such as ICP Certificates Legally

It should first be pointed out that whether a digital collectibles platform has obtained relevant administrative licenses is generally not necessarily related to whether the behavior constitutes a crime. Even if legislation further clarifies the types of administrative licenses required to operate a digital collectibles platform, operating the platform without such licenses is still unrelated to the illegality of illegal fundraising charges. The direct consequence of operating without relevant administrative licenses is merely administrative penalties.

However, a platform operating without administrative licenses carries a high risk of its operators using the platform for illegal activities. From the perspective of public security agencies, such platforms are likely to be viewed as having a high probability of engaging in fraud and other types of criminal behavior. Therefore, whether from the perspective of avoiding administrative risks or reducing criminal risks, obtaining such administrative licenses legally is an essential compliance point.

2. Platforms Must Not Interfere with Secondary Market Prices

Currently, many digital collectibles platforms have opened secondary markets. Although the names and methods vary, they generally allow digital collectibles to circulate among users. This is also the biggest risk point for platforms that have already encountered problems. For such open secondary market behaviors, an important compliance point for platform operators or personnel is that they must not artificially influence transaction prices through account manipulation, hiring "water army," etc. Otherwise, if a large number of users mistakenly believe that trading digital collectibles is profitable, they may face a flood of complaints afterward, which is often the reason behind criminal charges of fraud.

3. The Price Range of Digital Collectibles Should Be Reasonably Controlled

Generally, the sale price of digital collectibles is confirmed by the platform. As the court stated in its analysis of this case, "it has not yet formed a fair value system, thus leaving room for speculation." Therefore, there has always been a tendency for the pricing of digital collectibles to be "overvalued." However, this "overvaluation" is not a reason for constituting a crime. Just as merchants' appropriate exaggeration of the performance and value of their products is generally not treated as a crime, the "overvaluation" of pricing here will not lead to the sale of digital collectibles being deemed criminal. Nevertheless, even so, such exaggeration should remain within reasonable limits. In other words, pricing a product clearly worth no more than ten yuan at hundreds or thousands of yuan is obviously unreasonable and raises suspicions of "fraud." Therefore, reasonable control and confirmation of pricing is also a key point that industry practitioners in the digital collectibles sector should manage.

4. Platform Promotion Should Be Moderated

For innovative enterprises, one of the most common criminal risks they face is illegal fundraising crimes, and a key element constituting such crimes is inducement, i.e., "promising to repay principal and interest or provide returns in currency, physical goods, equity, etc., within a certain period." Whether verbal or written, once such language appears in promotional materials, it will generally attract the attention of public security agencies. Therefore, entrepreneurs in the digital collectibles industry especially need to be cautious not to use such language and should not claim that their collectibles are "investment products" with "investment value." As for "giving away physical goods" or "empowering rights," there is actually no problem, but the platform must ensure that the promised matters can be realized; otherwise, it may lead to breach of contract at best or fraud at worst.

In Conclusion

As digital collectibles platforms gradually devolve into "run fast" speculative games in the minds of players, how other platforms construct their compliance has become an urgent matter. Here, the Xiao Za team is willing to sound the alarm for friends still in the circle once again. Although the craze for digital collectibles has subsided, we still hope that all entrepreneurs can adhere to compliance bottom lines and maintain the operation of the industry until the tide truly recedes.