Chinese Court Defined NFTs as Virtual Assets

The Hangzhou Internet Court in the Zhejiang Province recently decided in a contractual dispute case that a non-fungible token (NFT) is a virtual asset. Moreover, the transaction of such a digital commodity is subject to the regulatory rules in the E-commerce Law of the People’s Republic of China.

In February of 2022, the plaintiff buyer ordered an “NFT digital collection”—a blind box for a limited edition of an art work—for about CNY 1,000 or USD 150 during a shopping spree event organized by an e-commerce platform. The platform (or the seller), however, did not transfer the ordered NFT immediately. Ten days later, the seller canceled the deal and forcibly refunded the plaintiff. In a fit of anger, the plaintiff buyer sued for a breach of the deal and claimed losses amounting to CNY 100,000 or about USD 15,000.

The defendant seller alleged that, before the transaction started, it had made the buying terms quite clear, stating that it would mandatorily conduct real-name authentications by verifying the last several digits of the buyer’s cellphone number along with their ID number. This was aimed at curbing abnormal activities involving the use of snap-up robots and ensuring that each buyer only purchases one NFT. Since the plaintiff’s personal information did not match that at the time the order was made, the defendant subsequently canceled the order. In order to end this deal in a fair manner, the defendant returned the payment to the plaintiff accordingly.

The court found that at the time of purchase, the plaintiff had failed to provide real personal information which was required as per a number of terms in the contract. The defendant’s advertisement for the sale of the NFT equated an invitation for offer. When the plaintiff buyer made a selection as to which blind box of NFT to buy, the advertisement became an offer made to the plaintiff by the seller. Subsequently, when the buyer’s order submission was completed, this was deemed to be a promise to the seller. At this point, a contract was established, which bound both parties to abide by any related terms within it.

The sale announcement, which constituted a part of the contract, clearly specified that valid personal information is required to make a successful order. In response to inaccurate personal information being entered in the electronic order form, the platform is entitled to terminate the contract. In the transaction at issue, the fourth digit of the cellphone number and the sixth digit of the ID number which the plaintiff had provided were not able to be authenticated. The defendant therefore exercised its contractual right to cancel the order and refunded the plaintiff.

The defendant was lawful in terminating the contract; thus, the court overruled the plaintiff’s claim for CNY 100,000. The case was dismissed.

According to the judgment, an NFT collection is vested with the common characteristics of a physical property, including its value, scarcity, disposability and tradability, as well as the particular characteristics that are unique for a virtual property, such as its being intangible and technical.

An NFT digital collection is a virtual artwork, the court emphasized. As an original expression of the creator’s artistic presentation, it shares the value of being intellectual property. Meanwhile, as formed between the nodes based on the consensus in the blockchain, it is a digital commodity possessing unique characteristics.

Furthermore, unlike with the purchase of tangible products, the NFT in the present case was traded on the Internet. In essence, this particular trade as a means of digital information exchange is a kind of a business event to sell virtual goods. As an e-commerce activity, it shall be subject to the regulations of the E-Commerce Law of the People’s Republic of China.

Notably, the legitimacy of a contract termination clause in a standardized agreement entitling an NFT seller to unilaterally terminate the contract shall be determined on a case-by-case basis. The court in the above dispute supported the NFT seller’s termination of the contract on the grounds of anti-fraud management and protection of consumers.