NFT marketplaces responsible for keeping fakes out, Chinese court rules

A court in the Chinese city of Hangzhou has ruled that marketplaces allowing the trade of non-fungible tokens (NFTs) are responsible for keeping out fakes, in a development that is likely to have major implications for the still-evolving asset class. 

Shenzhen Qice Diechu Cultural and Creative Co., Ltd. owned the exclusive global copyright to the comic series “I’m not a fat tiger” created by the Chinese artist Bu2ma last December. The artwork in question was one of the series in which a chubby tiger is nervously waiting for a vaccination.

Shenzhen Qice argued that the NFT marketplace did not take sufficient steps to disallow, and remove, fake NFTs uploaded on its website. This undermined the value of the NFT as its uniqueness was lost. It sought 10 million yuan (about US$1.6 million) in compensation and for the marketplace to stop the infringement.

The marketplace defended itself, arguing that an NFT’s unique address is the responsibility of the user. After being alerted to fakes, the marketplace took down infringing copies, it added.

But under Chinese copyright law, the court ruled that the marketplace’s failure to ensure the uniqueness of the NFT constituted aiding infringement. 

It ordered the defendant to destroy the infringing NFTs and compensate Shenzhen Qice 4,000 yuan.

In its ruling, the court opined that trading in NFTs is akin to a transfer of property and involves the rights of reproduction and the subsequent dissemination of the enforceability of those rights.

Hence, a person or entity minting or selling the NFT should be both the owner of the original work as well as the owner and licensor of its copyright.

Importantly, the court held that trust in the unique nature of an NFT is the cornerstone of trading in the asset class. Therefore, any flaws in enforcing the copyright of an NFT will damage the trustworthiness of the asset class and undermine the industry’s business model.

The development is an important step in the evolution of the burgeoning asset class in China. About 4.56 million NFTs with more than 150 million yuan (US$23 million) were sold in the Middle Kingdom through 2021. 

This has in turn attracted China’s Big Tech with firms such as Tencent, Alibaba, JD.com, Xiaohongshu, Bilibili, NetEase, and Weibo sniffing blood. As of Jan. 10, Alibaba’s NFT marketplace Jingtan (also known as Topnode) had more than 700,000 active users.