Author: Lawyer Liu Honglin

In order to further activate the transaction volume of digital collection users, many platforms have launched a new user trading method: “collection purchase” function. When the Mankiw team communicated with industry insiders, they also learned that many platforms that did not have the “collection purchase” function were also eager to try it recently. This article will talk about: Is it risky to launch user transaction modules such as collection purchase functions on the NFT digital collection platform? What can be done and which red lines cannot be touched?

0****1 Circular No. 37 and 38 of the Financial Exchange

In 2011 and 2012 respectively, the State Council and the General Office of the State Council issued the Decision of the State Council on Cleaning Up and Rectifying Various Trading Venues and Effectively Preventing Financial Risks (Guo Fa [2011] No. 38, hereinafter referred to as “Document No. 38”) and the Implementation Opinions of the General Office of the State Council on Cleaning Up and Rectifying Various Trading Venues (Guo Ban Fa [2012] No. 37, hereinafter referred to as “Document No. 37”).

**The status of Document No. 37 and Document No. 38 in the field of the Gold Exchange is comparable to the 94 announcement and 924 notice of the currency circle. ** China’s regulatory policy on illegal financial activities has always been resolutely curbed and severely cracked down, and the digital collection industry, which is not so clear about the boundary with financial risks, has always been the focus of attention.

0****2 Prohibitive provisions in Circular 37 and 38

The focus of Circular No. 37 and Circular No. 38 is to clean up and rectify all kinds of trading venues engaged in equity trading, large medium-term and forward transactions and other standardized contract transactions, including trading venues that do not use the word “exchange” in their names.

In Circular No. 37 and Circular No. 38, there are many access threshold restrictions for the establishment of exchanges, such as trading varieties, trading methods, number of investors, etc., and if these thresholds are not met, the corresponding “prohibitive provisions” must be observed.

In the two documents, for platforms operating NFT digital collection trading, the following two points need to be paid special attention to:

1. No trading venue shall split any equity into equal shares for public offering, and shall not trade by centralized bidding, market maker or other centralized trading methods; The equity shall not be continuously listed for trading according to standardized trading units, and the interval between any investor buying and selling or buying the same trading instrument after selling shall not be less than 5 trading days; Except as otherwise provided by laws and administrative regulations, the cumulative number of rights holders shall not exceed 200.
2. No unit shall conduct standardized contract transactions through centralized bidding methods, electronic matchmaking, anonymous trading, market makers and other centralized trading methods.

In addition, digital collection platforms for art and collectibles also need to pay attention to the fact that the Measures for the Administration of Art Business clearly stipulate that art business units “shall not split the rights and interests of art into equal shares for public offering without approval, and trade them through centralized bidding and market makers”.

03 Digital Collection User Transaction Compliance Recommendations

The core of the consignment function and purchase function of the digital collection platform is to provide users with a channel for the circulation of digital collections. When the trading function of a digital collection platform is both “buy” and “sell”, the platform side has a lot of room for operation in the process of “trading collections between users”, and can increase the liquidity rate by setting various rules, or earn fees from it.

However, no matter what kind of play the ** data collection platform adopts, it cannot touch the prohibited red line **** listed in **37 and 38 documents , regarding the setting of transactions, Mankiw’s lawyer gave the following compliance advice:

1. The purchase request function shall use peer-to-peer transactions, real-identity transactions, and direct transactions between buyers and sellers.
2. For the transaction price of digital collections, the buyer and seller shall participate in determining them, so as to avoid the platform party directly setting the purchase price of collections on the platform based on the external market price. At the same time, it is recommended that the platform set a certain maximum transaction price for the trading collection.
3. For the transaction mechanism of digital collections, the platform shall give users the right to independently choose the transaction partner, and avoid being identified as a centralized transaction mode such as continuous bidding, electronic matchmaking, and anonymous trading.
4. For the number of transactions of digital collections, it is recommended that the platform set the maximum number of simultaneous subscriptions for a single user.
5. Centralized trading modes, such as collective bidding, electronic matchmaking, anonymous trading, market makers, etc., are strictly prohibited. In the digital collection trading scenario, these terms can be simply translated as follows: Collective bidding is a digital collection platform that gathers all buy and sell orders within a quarter of an hour of opening for matching transactions; Continuous bidding is a digital collectible platform that matches all buy and sell orders every minute and second. Electronic matching refers to the transaction method in which many buyers and sellers simultaneously match and match, click to complete a transaction or other ways to facilitate the formation of a contract through the trading system. Anonymous transaction means that the person participating in the transaction is completely unaware of the identity, age, credit status and other non-transaction information of the counterparty. Market maker mechanism Simply put, the digital collection platform acts as an intermediary for users to buy and sell digital collections, and the platform buys digital collections from seller users at A price and sells digital collections to buyer users at B price.
6. **Standardized contract trading shall not be carried out in a centralized trading manner. **Standardized contracts of trading partners usually refer to contracts with relatively fixed terms other than price, place of delivery, delivery time, etc. Traders take such contracts as trading objects, when entering into contracts, they do not pay in full, but only pay a certain percentage of the value of the commodity as margin, you can buy or sell: after the contract is concluded, traders are allowed not to actually perform, but can settle their rights and obligations through reverse operations and hedging and closing positions.
7. **Public offering of any interest into equal shares is strictly prohibited. **For example, the digital collection platform cuts the copyright of a work into 1,000 copies, mints and distributes 1,000 digital collections, and the person holding the 1,000 copies of the collection enjoys its copyright and value-added rights and interests according to the proportion of ownership.
8. No**** “Standardized Trading Unit” means that equity other than equity is set as a minimum trading unit and traded in the smallest trading unit or a whole multiple thereof. “Continuous listing” means listing and selling the same digital collection within 5 trading days after the purchase of a digital collection, or listing for purchase of the same digital collection within 5 trading days after the sale. For example, for a digital collection with a circulation of 10,000 copies, the digital collection platform sets users to purchase at least 10 copies or multiples of 10 copies; At the same time, the platform does not limit the trading time of collections, and can be bought and sold immediately, which is easy to cause greater risks. Therefore, it is recommended that digital collectibles platforms set a “T+5” trading time limit.

0****4 Summary

In general, digital collection platforms should adhere to the concept of science and technology for good, reasonably select application scenarios, standardize the application of blockchain technology, resolutely curb the tendency of financialization and securitization of digital collections, and avoid high-pressure red lines, so as to do a good job in isolation and prevention of risks from illegal financial activities.