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China’s three major banking regulators have issued a warning against non-fungible tokens (NFTs) while the industry is reaching new heights globally.
The China Banking Association, the China Securities Association, and the Chinese Internet Financial Association have issued a joint statement to urge all commercial banks under their watch to adhere to industry regulations while dealing with non-fungible tokens (NFTs).
While understanding that NFTs are an innovative application of blockchain technology that can enrich the digital economy, the three watchdogs warned that they could potentially be used for money laundering, speculation, and illegal financial activities.
The regulators also highlighted that Chinese banks must resolutely curb the tendency of NFT securitization. They issued six pointers for banks to adhere to when dealing with NFTs, with the first being that they must not use securities, precious metals, and other financial assets in the underlying commodities for NFTs. This bars the use of NFTs to represent ownership of physical assets such as real estate, which is one of the proposed long-term uses of digital collectables.
China has banned digital asset trading, ICOs, and even block reward mining. But it has not banned NFTs yet. This has presented a potential loophole since NFTs are mostly purchased through digital currencies.
While issuing the warning against such practices, the three watchdogs stated that Chinese investors must not use “virtual currencies such as Bitcoin, Ethereum, and Tether as the pricing and settlement tools for NFT issuance transactions.”
Banks must carry out real-name authentication for issuing, selling and purchasing entities, properly preserve customer identity information and issuance transaction records, and actively conduct anti-money laundering checks.
Banks must also not directly or indirectly invest in NFTs nor provide financing for those investing in the digital collectables.
Suggested read: NFT Market Skyrockets to $44 Billion as Money Laundering Increases