This article is written by Shiwangi Singh, a law student from Banasthali University. This article talks about the booming industry of Non-Fungible Tokens (NFT), and how it is backed by a brilliant decentralised system of blockchain providing transparency to all the users and providing exclusive ownership rights to the owner of digital assets. It also deals with the legality of NFTs in India and the possibility that they may be supported by Indian legislation in the future by analysing the advantages and benefits that they offer.
It has been published by Rachit Garg.
Table of Contents
Introduction
Non-Fungible Tokens (NFTs) have been in tremendous use in recent years. Their use has exploded just because of the convenience they offer to everyone. This new development has boomed at such a fast pace that now everything like our drawings, photos, videos, GIFs, music, gaming items, selfies, and even a single tweet tweeted by us can be turned into an NFT, which can be further traded online using cryptocurrency. This form of crypto asset has exploded in popularity, and the sales of NFTs have surged up to $25 billion in 2021.
Seeing the recent surge in the usage of NFTs and blockchain technology, it is essential for us to know the basic functioning of these new technologies. Our country possesses a lot of interest in cryptocurrency, which is making India a front runner in the non-fungible token space. From common man to celebrities, everyone is talking about digital money, digital tokens, etc.
What is an NFT
NFT, non-fungible tokens, are unique digital tokens that function in a blockchain network. Blockchain is the underlying technology on which cryptocurrencies work. When we talk about converting our work into NFTs, it means we are converting it into a digital asset or digital token, which could be termed tokenisation. This tokenisation could be anything from a JPG file to music to a tweet; all these things could be converted into an NFT. It is any digital collectible that can hold value, and this value is based on what someone is offering to pay for it. Therefore, the demand for that digital asset sets its price.
Anything that can be converted into a digit asset can be termed an NFT. NFTs are gaining massive popularity now because they give people an excellent way to exhibit and sell their digital artwork. NFTs have gained huge investments since the time they came into use back in 2015. NFTs are backed by a brilliant backbone that is blockchain. NFTs work on blockchain, giving their users complete ownership of a digital asset.
For example, if a sketch artist gets his or her digital asset converted into an NFT, what he is actually getting is proof of ownership that he or she is the exclusive owner of that artwork. This ownership is powered by blockchain. Those who understood the real profit regarding NFTs at an earlier stage made significant profitable investments.
An NFT is a digital asset that has a unique identification code and metadata that differentiates it from a fungible token.
Characteristics of an NFT
- Non-fungible means it is non-replaceable or non-exchangeable, which signifies the unique value that every single NFT holds. Each token is unique and it cannot be exchanged for something exactly alike.
For example –
- Jack Dorsey, the billionaire founder of Twitter, recently converted his first-ever tweet into an NFT, which was later sold for $2.9 million. This action signifies that no other NFT is the same as this one, resulting in its uniqueness.
- A digital artwork was auctioned at Christie’s. This NFT was purchased for a whopping $69 million. It was a trailblazing moment for advocates of NFTs.
- NFT is not replaceable. It is only one type of copy in the world which indicates that no other thing holds the same value as that one particular item. For example – when we try to buy a book, we get to choose one copy for ourselves from millions of copies that got printed, which means you can buy any copy of that book, and it would be the same. It would be of the same price, contain the same contents, there would be no difference among them. But now, if we consider that one piece of the book which you were reading where you highlighted your important points, added your essential notes, now this piece of book holds a different value. This particular copy is not like the other million copies. If one decides to convert this copy into NFT, then it would hold a distinguished value. One can obtain a digital token of this copy, that would give exclusive rights of ownership over this particular piece of the book.
- The word ‘token’ in NFT signifies that one has the exclusive right of ownership of an item. It is a kind of agreement that tells us that we own something and shows our belongingness to that item. This kind of ownership can be tracked by everyone in the public, it is transparent. A token is riding on the blockchain, this transparency of ownership is only available because of the blockchain.
- A token proves the ownership of a unique, distinguished item by converting it into an NFT.
- NFTs are digital assets based on blockchain technology and traded through the use of cryptocurrency.
- Unlike downloading pictures and screenshotting them, people are willing to spend on NFTs only because it allows the buyer to own the original item, it contains built-in authentication, which serves as proof of ownership.
- NFTs are transferable, they can be transferred from one individual to another over the blockchain. It is available for sale and purchase and can be traced and retraced whenever one wants to.
What is a blockchain
A blockchain is a kind of database but very different from other databases. A blockchain is a chain of blocks where each block contains some information. The world’s largest cryptocurrency market, Bitcoin, is powered by blockchain.
Features of a blockchain
- The most significant and key nature of blockchain is that it is decentralised and has a shared nature. It means whenever a transaction is done, or let’s say a bitcoin transaction takes place, then it is transmitted to a network of peer-to-peer computers scattered around the world. Every single user present on the network can view all the details of the transaction and see who is the actual owner of a digital asset, it provides a very transparent environment where everything is visible to all the users.
For example – when in today’s time we do an online transaction from our bank account to another person’s bank account, all the transaction process is done at the bank level. The bank gives confirmation of the money sent from the sender’s account and then confirms the money received at the receiver’s end. This whole process stands only at a bank level, and no one else could see it. This type of system is known as a ‘centralised way of banking’, which offers no transparency to its users.
- In a blockchain environment, when transactions are completed, they get added to a block on the blockchain. These blocks are then chained together, creating a long history of all transactions that are permanent.
- Blockchain is accessible to a network of computers, which are called nodes. These computers can view the blockchain at any given point in time and can track each and every transaction that gets added to it. This is why we say that the data on a blockchain is immutable, it cannot change.
- In a blockchain as the information is shared with each and every node, so whenever one node faces any error in its data or if someone tries to tamper with the blockchain by compromising one of the nodes, then all other nodes would serve as reference points and would prevent tampering of information.
In the private sector, various companies are exploring blockchain to improve its effectiveness and trying to re-invent their processes and workflows to add value to their service delivery systems. 56 percent of Indian businesses are opting for the path of blockchain, making it part of their core business. The National Informatics Centre in India has established a Centre of Excellence (CoE) in blockchain technology, which operates as a coordinated, interoperable blockchain ecosystem around the nation. This makes it easy for the government to test-run projects before rolling them out for public interfaces.
By seeing the robust use of blockchain technology, it can be implied that it has a great future and that it will be our future technology. Many business enterprises, as well as the government, are considering applying this technology to improve monetary transactions with security. It would boost the growth of the economy digitally and make it more transparent and authentic.
Famous platforms for NFTs
- Rarible – It is one of the most popular platforms to buy NFTs. It is an open marketplace where sellers can create NFTs and buyers can buy those NFTs from the sellers.
- Foundation – It is a type of platform where when an artist wants to post their artwork, they have to receive invites or ‘upvotes’ from fellow artists or creators to post their art.
- OpenSea.io – This is a peer-to-peer platform where one can start to post their works by just creating an account on it. Different categories of art forms can be browsed and chosen from after that.
- Other websites that sell NFTs are – SuperRare, Nifty Gateway, VIV3, BakerySwap, Axie Marketplace, and NFT ShowRoom.
- Some of the best NFT marketplaces in India are – WazirX, Jupiter Meta, Bollycoin, BuyUCoin, BeyondLife, Colexion, etc.
Legality of NFTs in India
India has not yet passed any law regulating the NFT. The task of creating strong NFT laws is currently underway. According to some of the research, it is found that the Indian government and public sector have upheld and supported blockchain-based enterprises in which a huge portion of the world population has taken part. This digital world may experience a change after the enactment of the Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. Section 3 of this Bill has clearly stated that no person shall mine, generate, hold, sell, deal in issue, transfer, dispose of, or use cryptocurrency in the territory of India.
- The draft of the Bill defines ‘cryptocurrency’ as any information or code or number or token, which is not a part of any official digital currency and is generated through cryptographic means holding a digital representation of value that can be exchanged with or without consideration, that might involve risk of loss or an expectation of profits or income in a business, or stores a value or a unit of account and is used in any financial transaction or investment, but is not limited to investment schemes.
- It also defines ‘digital rupee’ as a form of currency that is issued digitally by the Reserve Bank and that is approved by the Central Government to be legal tender.
- It defines ‘miner’ as a person who is engaged in the mining of a cryptocurrency.
- ‘Mining’ means an activity that is focused on creating a cryptocurrency and providing validation for the transaction of cryptocurrency between a buyer and seller of cryptocurrency.
This Bill was drafted to ensure the legal status of virtual currency in India. However, it was not presented before the parliament nor was it discussed among the members of the parliament.
The Indian Budget of 2022 has proposed to impose a withholding tax on the transfer of virtual digital assets that would include both NFTs and cryptocurrencies. It would be effective from July 1. A tax deduction at source is also proposed, but it will still be too early to see how this taxation system would work.
Case law: Internet and Mobile Association of India v. Reserve Bank of India (2020)
This case was brought forward in the Supreme Court of India, where the Apex Court stated that the circular which was issued by the Reserve Bank of India is illegal and the process to enforce such a circular should be made unenforceable.
Issue of the case
In the following case, the Internet and Mobile Association of India was the petitioner and the Reserve Bank of India was the respondent. The petition sought clearance on the jurisdiction of the RBI, whether it has the authority to disallow the trade of virtual currency and impose a ban on it.
Background of the case
On the 6th of April, 2018, the Reserve Bank of India issued a circular which passed an order for the prohibition of trading in virtual currencies by banks and other entities. It further stopped the bank from providing any sort of service, either to an institution or an individual, by using virtual currencies.
The Bank stated its concern that enormous use of virtual currency trading may lead to unexpected hacking of data, which would result in terrorist attacks, money laundering, etc. There were certain services that RBI directed the banks not to deal with, which were regarding clearing, giving loans against virtual currencies, maintaining the accounts, registering, trading, settling, accepting the virtual currency as collateral, opening accounts on exchanges, and selling, purchasing, or transferring such virtual currencies.
This particular circular was challenged by the Internet and Mobile Association of India, which filed a petition before the Supreme Court regarding these issues. However, earlier in 2013, traders and holders of virtual currencies were cautioned regarding the legal risks and issues that are involved with such trading.
The petitioner sought clearance from the court regarding whether the Reserve Bank of India is authorised to pass an order to the banks regarding the stoppage of trading in virtual currencies.
Argument by the Petitioner
The petitioner mentioned that the RBI is not authorised to cancel trading in virtual currencies or cryptocurrencies, and also claimed that the ban imposed by the RBI was nothing but a misunderstanding made by it. It cleared the concern regarding cryptocurrency or virtual currency and stated that it is not a kind of currency note or coin but a store of value or medium of exchange and had no serious threat issues regarding the hacking of data.
Argument by the Respondent
The respondent countered the first contention made by the petitioner and stated that it has the jurisdiction to direct banks regarding the cancellation of trading in virtual currencies because it is a mode of digital payment. Therefore, the RBI holds the power to control the same.
Regarding the second contention that cryptocurrency or virtual currency is not a kind of currency note or coin but a store of value or medium of exchange, RBI stated that a virtual currency is a stainless digital currency that is used for trading, since the cryptocurrency is independent and immune to government interference.
Judgement
The bench was held by Justices Rohinton Fali Nariman, S. Ravindra Bhat, and V. Ramasubramanian.
The judges held that the RBI is vested with a huge amount of powers and plays a crucial role in uplifting the economy of India, but in this case, they are not able to show any kind of damage that could be suffered by the usage of virtual currency. Therefore, the Court held that the guidelines issued by the RBI that directed the banks to stop dealing or providing services to the entities trading in cryptocurrency are unenforceable.
The judgement came in favour of the petitioner, which is the Internet and Mobile Association of India. Therefore, the guidelines which were mentioned in the circular issued by the Reserve Bank of India were declared illegal and hence unenforceable. With this judgement, the businesses that were involved in cryptocurrency came back to their normal functioning, and trading in cryptocurrency was restored. The Court also struck down the circular issued by the RBI but didn’t clearly state anything regarding the legality of virtual currencies, whether they are legal or illegal, and as there has been no legislation regarding the same, therefore, virtual currencies remain unregulated in India.
NFTs’ future in India
As of now, NFTs are not legally valid in India, but soon we might have laws and regulations regarding NFTs. It will encourage enthusiasts to actively trade in NFTs. Non-fungible tokens will definitely have a great future in India with the developing laws and regulations. As far as we have learned, blockchain technology offers us much faster and cheaper cost-effective transactions across the globe. People have grown to trust this new method of blockchain and are starting to learn about its importance gradually. The future business world will grow with the help of blockchain, as it is very cost-effective. NFTs are getting popular among common men and celebrities. Famous entities have been launching their own NFT collections in recent times. These significant impacts mean that we can soon start trading through NFTs and get more valuable insights.
Thus, the NFT community will gain speedy momentum once the Indian government formulates specific laws and regulations for its validity. The NFT market is getting wider, and the digital economy will be boosted by the new entrants in the market for NFT and other digital assets.
Relevance of Copyright Act, 1957 in NFT
Whenever someone purchases an NFT, the owner does not get the copyright to the registered piece of NFT at that very instant. Section 19 of the Copyright Act 1957, states that if someone wants to transfer his or her copyright, then it would require a written sale contract declaring explicit assignment of copyright to be present. Therefore, the buyer cannot have full ownership until the owner specifically transfers their rights.
The difference between purchasing original artwork and an NFT is that the original copyright in the case of an NFT does not get quickly transferred to the new buyer of the NFT. When an NFT is purchased, the owner does not get the copyright to the original piece of art. They are unlikely to enjoy copyright protection just because they store their data backed by blockchain technology. They are not classified as original works or derivative works under intellectual property law. However, the works for which NFT is created may enjoy copyright protection.
Section 2(d) of the Copyright Act, 1957, defines the ‘author’ of the work as one who has created the work. He or she is considered the sole owner of the work unless the work is shared by a co-author, which implies both of them jointly owning the work, or if the work was created by a person or entity just because he or she was paid for it, or was created under employment. In such a case, the commissioner or the employer owns the work.
Section 14 of the Copyrights Act, 1957, provides exclusive rights of ownership to the owner, which also includes the right to mint the NFT of the work. Minting means converting a digital file into an NFT backed by blockchain technology.
The ownership of the NFT lies with the one who mints it. Therefore, it is not necessary that the owner of the NFT be the author of the work. However, minting an NFT of works that someone else has the right to use will essentially amount to stealing the works and will be considered an infringement of copyright. Therefore, before minting an NFT it is crucial that the person who is minting an NFT should hold the right to do so, either by being the author of the work or by obtaining the copyright over the work, or by obtaining the specific rights to mint the NFT.
It should be noted that digital artwork is also artwork, as it has always been, and copyright owners and their licensees are the only ones who should be creating NFTs based on copyrighted artwork.
Copyright laws treat NFTs the same as any other traditional artwork. Whenever a new artwork is created by an artist, he acquires the copyrights that signed him as the owner. By having those rights, he can create copies of his work and distribute or prepare other works originating from his main work as a derivative. Therefore, we can say that a copyright owner has the exclusive right to create an NFT based on an original piece of artwork.
Legal validity of ‘smart contract’
A copyright can be obtained for works like original literature, drama, music, artistic works, cinematographic films, and recordings of sound as per the Copyright Act, 1957. We can’t interpret from above whether an NFT would qualify as a work that can be copyrighted in India. Even though a video clip or a sound recording that can be converted into a digital asset can be copyrighted, other things like a GIF, a picture, or a tweet that can also form digital assets might not qualify as work capable of being copyrighted. Therefore, there is a need to expand the scope of copyright laws in India.
For a legal contract to be valid, an offer, acceptance, and consideration are the essential elements under the Contract Act. The smart contract contains the offer and acceptance components, but the consideration component may be problematic. Most of the time, payment is done through cryptocurrency in a smart contract, but as mentioned earlier, due to the legal status of cryptocurrency in India, it is difficult to state whether a smart contract would be considered legal or not.
Securities Law
As there is no formal or legal structure of legislation for NFTs, there is no proper categorisation of NFTs under the Securities Contract Regulation Act, 1956(SCRA). Section 2(ac) of the SCRA defines the term ‘derivative’ as “a contract whose value is derived from the prices of the underlying securities”. Trading in NFTs would be illegal in India if they were considered a derivative, because then they cannot be traded on virtual platforms as per Section 18a of the SCRA. Derivative contracts are considered legal only when they are exchanged on a recognised stock exchange. In such a case, the platforms where NFTs are exchanged must apply to the Central Government for recognition as a stock exchange.
Collective Investment Schemes (CIS)
CIS are commonly called as ‘investment funds’, ‘mutual funds’ or simply ‘funds’ where money is pooled together with that of other investors and spread over the whole range of assets within the fund. The qualities of an NFT and the rights granted to a token buyer shall determine if it is a type of financial instrument.
Money laundering in NFTs
This malicious practice is more prevalent in the world of art, where criminals purchase an art piece with the illegally obtained money and later sell that NFT at a higher rate, which in turn gives them white money. In this way, they escape the regulations and law and conceal their criminal activities.
Money laundering means concealing the origin of illegally obtained money to make the source of money untraceable. It is easy for criminals to put their ill-gotten money into art pieces, simply because of the fact that the value of art is fundamentally subjective. Transactions in the NFT world also provide anonymity and privacy to criminals. However, the transparent blockchain technology makes it easier to detect and accurately estimate the amount of laundered money in NFTs. By proper law enforcement, money laundering needs to be monitored meticulously by marketplaces and curbed out of these virtual world transactions. Changes to the Antiquities and Art Treasures Act of 1972 and the Prevention of Money Laundering Act of 2002 will be necessary if NFTs become lawful in India.
FEMA Regulations
The assets that are transferred via NFT, whether physical or digital, will be subject to the Foreign Exchange Management Act 1999 and regulations that are involved in cross-border transactions. Although it is unclear, NFTs can be categorised as ‘intangible assets’ and governed under the software and intellectual property parts of the FEMA regulations. The main issue arises from pinpointing the location of an NFT, which may cause NFT holders and exchanges to circumvent FEMA restrictions entirely.
Tax levied on NFTs
All virtual digital assets, including NFTs, are subject to a 30% tax levied by the government. The 2022-2023 Budget has clearly mentioned that it would levy 30 percent I-T plus cess and surcharges on transactions dealing with virtual currencies.
Conclusion
Non-fungible tokens are an evolution in the world of cryptocurrencies. NFTs have become a potent force for change, as they provide a tamper-resistant blockchain that stores all the information and provides the authenticity of ownership. It removes the intermediaries in the process of the transaction and represents a transparent report of all the transactions done in the form of blocks on the blockchain network. NFTs can be used to represent individual’s rights to property and identities.
NFTs have been a trailblazer over the past year because they are new, exciting, and generate massive price tags. Being backed by blockchain technology, the parties involved in NFT transactions are able to maintain anonymity and privacy. People get a chance to conceal themselves from the regulatory authorities and try to disobey the law.
NFTs are the most recent type of crypto asset with a very important future. In India, it holds some risks because it has no legal status here. The legalisation of NFTs is necessary for the better trading of NFTs in India.
Frequently Asked Questions
What is the difference between an NFT and Cryptocurrency?
| NFT | Cryptocurrency |
| It stands for a non-fungible token, which implies it is non-replaceable and non-exchangeable. | Physical money and cryptocurrencies are ‘fungible’ which means they can be traded or exchanged for one another. |
| The value of all NFTs is different, each has a digital signature, which makes it impossible for NFTs to be exchanged for or equal to one another. | They are equal in value and are identical to each other in terms of the value they hold. |
| For example – one NBA top shot clip holds one single distinguished value in NFT. It would not be equal to any other NBA top shot clip. | For example – one dollar is always worth another dollar and one bitcoin is always equal to another bitcoin. |
What is the similarity between cryptocurrency and NFT?
The only similarity that cryptocurrency and NFT hold is that they are both backed up by blockchain technology.
References
- What Are NFTs And How To Buy Or Sell Them?
- Everyday Technology: What are NFTs? How are they different from cryptocurrency?
- How Blockchain Will Help India Take a Digital Leap – BusinessToday
- What is the future for blockchain technology with NFT’s in India?
- What Is An NFT? How Do NFTs Work? – Forbes Advisor INDIA.
- NFTs in India: Legal implications – The Hindu BusinessLine
- NFT’S And Indian Law
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