Last August, when Tencent launched its Huanhe (aka Magic Core) NFT trading platform, China’s digital collectibles sector was just awakening. The first batch of digital collectibles to launch on the platform — 300 tokens centered on Tencent News’ well-known IP “Thirteen Invitations,” which users could customize with a personalized engraving — sold out within a second of going live on August 3. Sales on Huanhe continued to soar into 2022, with growth logged in February through March.
However, less than a year into its existence, the Chinese tech giant now looks to be winding down Huanhe. While Tencent has not made an official announcement to that end, the Tencent News subsidiary shut down its own digital collectibles arm on July 1, urging users to download Huanhe instead, though drops on the app have notably slowed.
It’s news that bears out the sobering fact that, despite early sales records, trading on Huanhe has significantly dwindled since its early days. In June, the platform unveiled digital collections featuring the calligraphic works of Master Hongyi to cold reception — 20,245 of the NFTs were left unsold. The slow sales saw Huanhe eventually locking and closing transactions on the collections, marking them as “ended” as opposed to “sold out.”
This lackluster performance has been attributed to the price of these particular collectibles (more than 100 RMB), as much as Tencent’s regulations that restrict secondary transactions. In June, Tencent, along with other major Chinese companies including Ant Group, Baidu, and JD.com, formalized a pledge to halt secondary trading on their platforms, likely to make peace with a government keen to rein in speculation on the cryptocurrency and digital collectibles fronts.
Trading aside, Huanhe faced a copyright dispute in May when it launched a digital collection featuring works by the late Chinese painter Xu Beihong. Though the NFTs swiftly sold out (and for as high as 128 RMB), the Xu Beihong Art Museum issued an official statement on Weibo accusing Huanhe of distributing the artist’s works without authorization. According to the museum, only three local digital collectible platforms have signed licensing agreements with the institution and Huanhe is not one of them.
Further compounding the legal risk is Tencent’s falling net profits, which dropped by more than 20 percent in the first quarter of 2022 and have been declining for three consecutive quarters. On a recent earnings call, the company’s CEO Ma Huateng said that in the face of these challenges, Tencent has implemented cost control measures and adjusted some of its non-core businesses. Huanhe is likely in the crosshairs as Tencent looks to optimize its cost structures.
As Zhang Yi, a senior analyst at iiMedia Research, reflected to China Finance, Tencent’s shuttered businesses fall into two categories: unprofitable ventures and those with legal risks. A digital collectibles platform like Huanhe, with its ebbing sales and uncertain regulatory future, paired with the global crypto bear market, might represent an unattractive prospect for the company.
So what does this mean for Tencent’s Web3 ambitions? They’re far from abandoned: as it is, the company remains dedicated to metaversal development, in which its prominent gaming presence, social network, and existing financial technology services will give it an edge. It’s already hosted TMELAND, China’s first music festival in the metaverse, and more recently, Tencent has established an “extended reality” unit, even in the wake of its cost-cutting measures. That the metaverse represents a $4 trillion growth sector in China, with cities including Shanghai and Guangzhou introducing metaversal plans, cannot go unnoticed by one of the country’s leading tech players.
And what of digital collectibles in China? iiMedia Research’s Zhang Yi emphasizes that Huanhe does not represent an industry case; instead, its rise and fall is more a microcosm reflecting the difficulties, whether copyright or compliance, that come with the early-stage development of a sector. The lack of clear governmental guidance has only compounded these challenges. The research firm’s own survey data additionally found that most digital collectibles are bought by young consumers, who mainly view these purchases as appreciating investments that they hope to trade on a secondary market.
The curtailing of this secondary trading will restrict the continued growth of China’s digital collectibles sector, but also highlights the need for sellers to value-add for consumers in different ways. Huanhe has neither introduced collections with open copyrights nor actively built on Tencent’s own IPs — factors that could have enhanced the competitiveness of the platform. By shifting and locating the value of digital collectibles apart from speculation and a secondary market, the sector might have a sustained life beyond the digital collectibles boom and even amid a gray regulatory environment.
Translated by Min Chen