China has made its distaste for cryptocurrencies abundantly clear but, as a result, it is also shutting itself off from the world’s hottest new asset class, non-fungible tokens.
An NFT is a digital asset, such as an image, audio clip or GIF (graphics interchange format), whose ownership is recorded on a tamper-proof digital ledger known as a blockchain.
This emerging asset class took off in a considerable way last year with a digital-only piece of art selling for US$69 million. Since then, an increasing number of celebrities and artists, as well as fashion, music, tech and sports brands, have been creating, buying and selling NFTs.
They’re usually based on a blockchain platform, predominantly Ethereum, with people paying for the tokens in cryptocurrencies such as Ether.
However, Beijing has taken an “anti” approach to digital currencies, banning the trading of them in the People’s Republic of China.
As such, NFTs in China are not purchased with crypto; rather, buyers use the Chinese yuan. They’re also not built on a blockchain like Ethereum. Instead, they are built on other blockchains over which the authorities have oversight.
Investors can buy these “digital collectibles” (as they are referred to in China – notice they won’t allow the word “token”) from a marketplace, but secondary trading is not allowed.
Unsurprisingly, tech companies are extremely wary about the globally booming NFT market, in order not to get on the wrong side of the regulators.
Last Thursday, Tencent’s WeChat suspended some verified accounts associated with NFTs. Similarly, in June 2021, Alibaba was quick to ban NFTs from resale on its second-hand market when it discovered that one of its NFT products was being resold at several thousand times the original price.
All of this means that China is putting itself on the back foot of a global investment megatrend.
This is supported by recent findings from a global poll carried out by deVere Group, which show that 52% of those born between 1980 and 1996, and 74% of those born between 1997 and 2012, would welcome the inclusion of NFTs in their portfolio mix.
To my mind, there’s no doubt that investors outside China will continue to pile into NFTs – and for three main reasons.
First, this new digital asset class has value thanks to the blistering pace of the digitization of our world. Millennials and Gen Z especially have digital lives and it’s natural to want to take digital representations of, say, luxury brands, music, sport and art into these worlds – and now they can with NFTs.
Second, NFTs are making business models, especially in the creative sectors, more profitable and rewarding.
Artists and musicians for example can provide enhanced virtual experiences for collectors and buyers, they can determine if their works are counterfeited, and they can include criteria to get royalties every time their works are resold in the future.
And third, this asset class can act as a major diversifier in investment portfolios. NFTs have a very low correlation to other assets, such as stocks and bonds, and can, therefore, lower your portfolio’s overall risk and volatility levels.
Some traditionalist commentators have dismissed NFTs as a fad and/or a bubble about to burst. I would suggest that these would have been the sort of people, including some tech experts, who also dismissed the Internet in the 1990s and the likes of Amazon in the 2000s as “hype.”
Therefore, I suggest that China’s tough stance on crypto, which is negatively impacting its ability to participate in the global NFT market, is placing itself on the wrong side of history.
Nigel Green is founder of the deVere Group financial advisory organization. Follow him on Twitter @nigeljgreen.