Recently, the market of altcoins has been hot, and many old projects have doubled in price in just a few days. However, many NFT projects born in the last bull market have performed poorly in the trading market due to liquidity issues. In China, in recent years, some NFT digital collection platforms have cooperated with various well-known IPs to jointly issue NFT digital collections, and planned a series of empowerment and holding rights for NFT digital collections at the time of issuance. However, due to supervision and market conditions, the empowerment was postponed, the price plummeted, and eventually users defended their rights. Today, let’s talk about the rights protection path of domestic NFT digital collections based on cases.
Paths for users to participate in domestic digital NFT platforms
The path for users to participate in NFT projects issued by domestic NFT digital platforms is different from that of NFT projects on overseas public chains. Users participating in domestic digital platforms generally use third-party payment channels to deposit RMB. After depositing, you can snap up and bid for new NFT digital collections issued by NFT brand issuers in the digital platform in the primary market, or you can buy NFT digital collections sold by other users through the secondary trading market. In this process, the issuer of NFT digital collections will construct narratives and IP empowerment to continuously bring rights and interests to NFT digital collection holders. The price of NFT digital collections will also fluctuate accordingly, and some participants will earn investment returns through buying and selling transactions.
The contractual validity of users purchasing NFT digital collections in judicial practice
From the above analysis, it can be seen that the operating model of the NFT digital collection platform is similar to virtual currency transactions. NFT is also a non-fungible token from a technical perspective, so many people will question the contract validity of users purchasing NFT digital collections through domestic digital collection platforms.
Let’s take a look at the validity of contracts involving NFT digital treasures through cases in judicial practice. How does the court determine it?
Typical Case of Shandong High Court - Yang XX v. a Cultural and Creative Company Sales Contract Dispute
Case facts:
In April 2022, a cultural and creative company developed an APP to engage in the online distribution and platform operation of digital collections, and issued a series of digital collections such as Space River, Guardian Shield, Three Sects, Spirit Beast Cards, and Digital Humans. In the process of issuing digital collections, a cultural and creative company used marketing and promotion methods such as empowering digital products, such as free participation in offline salons and art exhibitions, and using dividends, trading rankings and giving away physical objects.
Yang registered an account in the above-mentioned APP in July 2022. After registration, he frequently purchased the above-mentioned series of digital collections issued by the platform. During this process, Yang also conducted secondary market transactions of digital collections with other registered players on the platform, buying and selling digital collections. In this regard, Yang said in court that "I bought digital collections because they are relatively novel and have room for appreciation" and "I am interested in the empowerment of digital collections such as dividends, lotteries, and offline salons." Yang has recharged a total of 22,685 yuan on the APP platform. After September 2022, as the popularity of digital collections decreased, the above-mentioned digital collections that Yang recharged and purchased depreciated significantly. Yang believed that a certain cultural and creative company had engaged in false propaganda and illegal marketing and sued the court for this.
The court held that:
Digital collections refer to digital publications that are issued, purchased, collected and used through the Internet using blockchain technology to generate unique digital certificates corresponding to specific works and artworks. Digital collections have certain exchange value based on their artistic characteristics, non-replicability, scarcity and other characteristics, and can be exchanged as commodities. In addition, there is no law in my country that explicitly prohibits the issuance and trading of digital collections. According to the principle that in civil and commercial activities, if there is no prohibition, then it is permitted, the trading of digital collections should not be considered illegal. Therefore, the transaction of digital collections between the two parties is a civil legal act that occurs voluntarily between the two parties and should be deemed legal and valid.
Shanghai Xuhui District Court - Wang and Wu's entrustment contract dispute case
Case facts:
The plaintiff Wang handed over his virtual currencies such as ETH, BUSD, USDT, SAND, GALA and NFT digital collections such as Doodles and Azuki to the defendant Wu for operation and management. Later, due to the need for his own capital turnover, Wu sold all of Wang's virtual assets for US dollars without Wang's consent and took the proceeds of US$572,245 for himself.
The court held that:
According to relevant legal provisions, civil subjects shall not violate the mandatory provisions of laws and administrative regulations when implementing civil legal acts, and shall not violate public order and good customs. In this case, the plaintiff Wang handed over his virtual currencies such as ETH, BUSD, USDT, SAND, GALA and NFT digital collections such as Doodles and Azuki to the defendant Wu for operation and management. Wu further carried out investment and trading activities such as conversion between virtual currencies and exchange of virtual currencies for US dollars, and the entrustment contract relationship between the two parties was established. However, according to the notices and announcements issued by the People's Bank of China and other departments, virtual currencies are not issued by currency issuing agencies, do not have monetary attributes such as legal compensation and compulsion, are not real currencies, cannot and should not be circulated and used as currencies in the market, and citizens' investment and trading of virtual currencies are not protected by law. Based on this, Wang entrusted Wu to invest and trade virtual currencies, which is also suspected of violating the mandatory provisions of relevant laws and regulations and undermining public order. The content of the entrustment contract between the two parties should be invalid. However, since digital collections themselves are not prohibited by laws and regulations, the contract involving digital collections is valid.
It is not difficult to see from the cases of Shandong High Court and Shanghai Xuhui Court that in judicial practice, the court has determined that the issuance and transaction of NFT digital treasures is not prohibited by laws and regulations, and voluntary NFT digital treasure transactions should be deemed legal and valid. In the trial of relevant cases, the court distinguished NFT digital treasures from other virtual currencies and did not apply industry regulatory regulations such as the "94 Announcement" and "924 Notice".
The path for NFT digital collection users to protect their rights in judicial practice
1. Request to terminate the contract and return the purchase price
Users who participate in the purchase of NFT digital collections generally purchase directly from the issuer of the NFT digital collection through the digital collection platform or trade with users on the platform. In essence, this type of NFT digital collection transaction is a sales contract.
If something happens during the performance of the NFT digital collection sales contract that makes it impossible to achieve the purpose of the contract, the contract can be terminated by exercising the statutory right of termination as stipulated in Article 563 of the (Civil Code), and the other party can be required to return the purchase price of the NFT digital collection. Specifically, if the NFT digital collection cannot be delivered due to technical reasons, transaction restrictions, etc. during the NFT digital collection transaction, the buyer cannot obtain the NFT digital collection, and the purpose of the contract cannot be achieved. The buyer can request to terminate the contract and return the purchase price.
In the case (2022) Zhejiang 0726 Minchu 4021 heard by the Pujiang County Court of Zhejiang Province, the plaintiff Chen Moumou and the defendant signed a sales contract for NFT digital collections. Later, Tencent Huanhe Digital Collection Platform issued an announcement stating that it would stop issuing digital collections from August 16, 2022 (i.e., it could no longer be transferred). Due to the transaction restrictions of the digital collection platform, the purpose of the NFT digital collection contract signed by the plaintiff and the defendant could not be achieved, and the plaintiff could not obtain the NFT digital collection. In the end, the court ruled to terminate the contract and return the purchase money.
2. Claim a refund based on the Consumer Protection Law
In the case (2022) Yu 0106 Minchu 26755 heard by the People's Court of Shapingba District, Chongqing, the plaintiff Wu believed that the defendant had not fulfilled the rights and interests promised when selling NFT digital collections, and there was false propaganda and consumer fraud, based on Article 20 of the Consumer Rights Protection Law, and requested the defendant to refund the purchase fee and compensate the plaintiff for three times the fee of 47,051.85 yuan. In the end, the court determined that there was no fraud in the sale of NFT digital collections provided by the plaintiff, the rights and interests promised by the defendant at the time of sale had been fulfilled, and there was no situation in which the plaintiff fell into a misunderstanding and expressed the intention to purchase, so all the plaintiff's claims were dismissed.
In the case (2022) Yue 0606 Minchu 35095 heard by the People's Court of Shunde District, Foshan City, the plaintiff also claimed the return of the purchase price of NFT digital collections based on the (Consumer Rights Protection Law), and believed that the defendant had engaged in inducement and fraud. However, during the trial, the plaintiff confirmed that the digital collections have collection value and are not consumer goods. At the same time, he admitted that he voluntarily purchased them after he saw them in the transaction. In the end, the court dismissed all the plaintiff's claims.
In the above two cases, the purchasers of NFT digital collections defended their rights based on the (Consumer Rights Protection Law), believing that the issuer of NFT digital collections promised many rights and interests at the time of sale, but ultimately did not realize them, which was false advertising. However, it is necessary to first clarify that Article 2 of the (Consumer Rights Protection Law) stipulates that consumers who purchase, use goods or receive services for daily consumption needs are protected by this law. Many users purchase NFT digital collections because of the uniqueness and scarcity of NFTs, which have collection value, and they can invest and buy and sell in the trading market to earn the difference, rather than purchasing for daily consumption, so they are not consumers protected by the (Consumer Rights Protection Law). In the case heard by the Shunde Court above, the purchaser of the plaintiff's NFT digital collection also admitted the purpose of purchasing the NFT digital collection during the trial.
3. NFT digital collection transactions involving currency can claim that the contract is invalid
When participating in some NFT digital collection platforms, investors of NFT digital collections may encounter the need to deposit money first, convert RMB into USDT, and then use USDT to purchase NFT digital collections on the platform. This kind of NFT transaction involving currency can be claimed to be invalid for violating the provisions of the "94 Announcement" and "924 Notice". In judicial practice, some regions will return property or share losses based on the fault of both parties for the consequences of the invalidity of currency-related contracts. In the case (2023) Hunan 0105 Minchu 13207 heard by the Kaifu District People's Court of Changsha, the court determined that the contract for the purchase and sale of USDT was invalid and supported the plaintiff's request for the return of the purchase money.
